The S&P is starting to have a very top heavy feel to it. Before I give some of my thoughts, this article on Investopedia sums it up very well.
When: March 11, 2000 to October 9, 2002
Where: Silicon Valley (for the most part)
Percentage Lost From Peak to Bottom: The Nasdaq Composite lost 78% of its value as it fell from 5046.86 to 1114.11.
Synopsis: Decades before the word “dotcom” slipped past our lips as the answer to all of our problems, the internet was created by the U.S. military, who vastly underestimated how much people would want to be online. Commercially the internet started to catch on in 1995 with an estimated 18 million users. The rise in usage meant an untapped market–an international market. Soon, speculators were barely able to control their excitement over the “new economy.”
Companies underwent a similar phenomenon to the one that gripped Seventeenth century England and America in the early eighties: investors wanted big ideas more than a solid business plan. Buzzwords like networking, new paradigm, information technologies, internet, consumer-driven navigation, tailored web experience, and many more examples of empty double-speak filled the media and investors with a rabid hunger for more. The IPOs of internet companies emerged with ferocity and frequency, sweeping the nation up in euphoria. Investors were blindly grabbing every new issue without even looking at a business plan to find out, for example, how long the company would take before making a profit, if ever. Obviously, there was a problem. The first shots through this bubble came from the companies themselves: many reported huge losses and some folded outright within months of their offering. Siliconaires were moving out of $4 million estates and back to the room above their parents’ garage. In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.
Many argue that the dotcom boom and bust was a case of too much too fast. Companies that couldn’t decide on their corporate creed were given millions of dollars and told to grow to Microsoft size by tomorrow. Written By Andrew Beattie.
Nothing Goes Up For Ever
When I started to write today’s Opening Print, I could have done my own overview of the onset of the 1999-2000 tech bubble, but I think Andrew Beattie did a good job of that. What I would rather do is take you back in time to when I was running the world’s largest S&P 500 futures desk on the CME floor, and how I saw the other side of the coin.
It starts in the summer of 1998, when all of a sudden a bunch of college kids started showing up at the ‘Limit Up’ bar and the ‘Merc Club’ at 30 S. Wacker. In most cases traders from the floor would not notice this type of stuff, but they were wearing shorts, sandals and puca beads, and they talked loud. I am not sure who said it was ok, but I’ll get to that later. Who were these loud mouthed kids? They were not the kids of the traders on the CBOT, CBOE or the MERC looking for summer jobs. Who were they? They were the ‘kids’ that thought they were smarter than the guys on the floor, and they were not afraid to tell you how much they made. They were part of the tech stock day trading rooms that popped up all over the place in the two years leading up to the tech bubble.
Were they really traders? I don’t think so, but they were smart enough to have caught onto to the tech melt up. Did that make them traders, or did they catch on to a fad? Some kids were making $150,000 a day, or more! Like the story above said; many people thought the ‘dotcom boom and bust was a case of too much too fast.’ I am here to tell you the writing was on the wall.
In most cases when people talk about the 2000 Tech Bubble they leave out the 1999 part, I do not see how. because the markets had been going up and up for several years. Sure there were pull back and drops, but as I see it, the rally really started in 1994-1995, and by the time 1999 -2000 rolled around it was already well out of hand. By the early part of 2000 it was not hard to see that things were not going to end well.
Every no name tech company that was doing an IPO was taking off, and the young college tech stock day traders were about to be taught a big lesson. The lesson they learned was that they could make money fast by buying these no name companies, but when the NASDAQ started to roll over, they didn’t know how to sell / get out. Sure some of these kids were smart enough to make some ‘fast cash’ and get out of the biz, but most thought they were traders. What they found out was they were not actually traders, but kids that caught on to the very, very popular world of trading tech stocks. The problem was that they came late to the party.
By the time the calendar turned over to the new century, things started to turn, and would continue for the next 2.5 years. It was one of the biggest bloodbaths I had ever seen, and I will never forget it. I knew a couple of these guys, and another buddy used to brag to me about all the cash these kids were making, and all I could say is…it won’t last long.
THE BLOOD BATH
In the Spring of the new millennium things started to unfold. Some of the big name tech companies were starting to fall apart, some losing 50%, or even 80%, of their value in days. I remember the months and months of watching the Nasdaq moving higher, and how we would all say the same thing; the markets have been going up too far, too fast, and it’s not going to end well.
Is comparing the current rally to the tech bubble a fair idea? My guess would be that most people would say no, that the current environment is not at all like it was in 1999-2000. But didn’t all the big banks like Goldman, CitiBank, JP Morgan, Wells Fargo, Bank of America, Deutsche and Merrill Lynch all say the housing market was sound and there was no credit default risks, or better yet, a credit crisis on hand? History has taught us that after big rallies come big let downs. Like the tech stock day traders, who found out how easy it was to buy a no name tech company and watch it run up, they had no idea how to get out when the markets reversed. It has taken almost 17 years to get the Nasdaq back to 5,000, and with the Dow Jones trading on new highs at 20,400 and the S&P futures trading 2329.00 high, even the most bullish are starting to question how long this can continue.
There is a rich history in NY and in Chicago of famous traders and how they made millions. These traders worked the pits buying and selling. They not only knew the markets they were trading, they were the markets. When the kids with the puca beads showed up, all I could think of was, will they be smart enough to keep any of it? In the end, I am 100% sure none of them did. These kids got up in the morning, threw their shorts on, parked in the CME parking lots, and were not afraid to tell you that they were traders, just like the guys on the floor were. In the end, they found out that the only way to be a good trader is to not just know how to buy, but also how to sell.
They just were not around long enough to learn that part of it. I understand the economic uptick in the fourth quarter, and I understand the excitement surrounding the new president, but the S&P up 15% in less than 90 days? All I ask its that you take the time to comment on this post. After all, if these are not our fathers markets or charts, whose are they?
While You Were Sleeping
Yesterday the S&P’s opened at 2219.00, made a 2218.50 low and pushed higher up to an afternoon high of 2229.00 at 12:30 cst, again fitting into the 10 handle rule which has worked very well lately. The afternoon saw some mild weakness, as the index futures pushed down into the close on a MOC imbalance of $380 million to sell. The ESH17 traded down to 2324.50, just a 4.5 handle pullback, before settling the day at 2226.50, up 13.75 handles, or .60%.
Overnight, markets in Asia leaned lower, led by the Nikkei, and Europe opened up mixed but overall weaker. The S&P 500 futures opened globex at 2326.50 and made a high of 2327.50 in the first 15 minutes before trading lower for much of the night. The futures made a low of 2323.25 early after the Euro open in what has amounted to a 4.25 handle range with volume at 72k as of 6:27 am cst.
In Asia, 8 out of 11 markets closed lower (Nikkei -1.13%), and in Europe 6 out of 11 markets are trading lower this morning (DAX +0.05%). Today’s economic calendar includes NFIB Small Business Optimism Index, PPI-FD, Producer Price Index, Jeffrey Lacker Speaks, Redbook, Janet Yellen Speaks, Dennis Lockhart Speaks, and Robert Kaplan Speaks.
Yellen Speech Preview from Barclays & BofA/ML
Barclays:
We expect Chair Yellen to reiterate her message that the economy is close to full employment and inflation has risen, but remains short of the Fed’s target.
We think she will refrain from explicit comments on fiscal policy. If pressed on the issue, we expect her to say that that expansionary fiscal policy when the economy is at full employment is likely to lead to more regular rate hikes, although she will emphasize that the removal of accommodation is still likely to be gradual and will ultimately depend on the details of the fiscal measures that will be implemented.
BofA Merrill:
Fed Chair Yellen will be appearing before Congress in the semi-annual monetary policy testimony. We expect her prepared remarks to sound similar to her most recent speech, noting that the labor market has tightened and wage pressures are increasing modestly. She will likely note that the Fed is making progress toward its mandate of full employment and price stability with core inflation approaching the target.
However, we expect Yellen to reiterate that the Fed must proceed with a gradual hiking cycle since rates are still close to the effective lower bound and that long-term rates are structurally lower. In the Q&A session, we expect the focus to be on the debate over rules-based policy vs. discretion, the Fed’s independence and proposed fiscal policy. Yellen is likely to defend the Fed’s independence and reiterate that fiscal stimulus is helpful, but that it depends on the design, especially given high debt levels.
Our View
We have a big day of eco reports and Fed speak ahead but we think it’s important to give the February options stats a good look. The most positive days of the week are Monday and today, and then the stats get weak. Lets face it traders, no one knows for sure when the S&P is going to ‘reverse,’ but we do know it can not keep going up as it has. My gut is telling me that the stock market is getting close to making some type of high. I said to watch for some type of sell off / correction in the first quarter, and the Feb option’s expiration and the end of the month could be a starting point. I have to admit that I could be totally wrong, but I have to go with my instincts. Our view is that the next 30 handles from 2323.00 is down. Like always, you can sell the early to midday rallies and buy weakness, while keeping in mind that the S&P may be at or near the high of this push.
Download all of the February expiration stats here
Market Vitals for Tuesday 02-14-2017
[gview file=”https://mrtopstep.com/wp-content/uploads/2017/02/Market-Vitals-17.02.14.pdf”]
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 8 out of 11 markets closed lower: Shanghai Comp +0.03%, Hang Seng -0.03%, Nikkei -1.13%
- In Europe 6 out of 11 markets are trading lower: CAC +0.12%, DAX +0.03%, FTSE +0.05% at 6:00am ET
- Fair Value: S&P -2.51 NASDAQ +1.61, Dow -36.53
- Total Volume: 1.2m ESH and 2.0k SPH traded
No responses yet