- Last week saw unprecedented declines in the major indexes, but an unusually strong bullish mood was evident, reaching levels not seen in the past 20 years.
- The frenzy is fueled by the unprecedented frequency of new all-time highs in 2024 (11 times already), creating FOMO among investors.
- The dominance of tech giants in the S&P 500 has raised concerns about market concentration and its effects.
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Major U.S. stock indexes fell slightly last week, marking the second negative week in the past 16 weeks.
If that's all there is to it, everything will seem normal. However, bullish sentiment continues to rise at unusually high levels, reaching the highest level in 20 years.
Source: Highmount Research
This sentiment stems from the fact that the market is hitting all-time highs more frequently than in 2022 and 2023, when it only hit one new high each year.
There have already been 11 new highs in 2024 alone, contributing to the rise in FOMO, especially in tech stocks.
Allocation to high-tech sectors is at its highest level since August 2020.
Is a rotation into the technology sector underway?
More specifically, let's focus on six stocks. Each stock boasts such impressive valuations that it seems almost difficult to understand.
- Microsoft (NASDAQ:) ($3.1 trillion)
- Apple (NASDAQ:) ($2.9 trillion)
- Nvidia (NASDAQ:) ($1.8 trillion)
- Amazon (NASDAQ:) ($1.8 trillion)
- Google (NASDAQ:) ($1.9 trillion)
- Facebook (NASDAQ:) ($1.2 trillion)
The Bank of America article pointed out that Nvidia alone is worth more than the entire Chinese stock market.
This means that Google, Amazon, Apple, and Microsoft are all larger than many stock markets and have increased their allocations in the S&P 500 index.
S&P 500 Top 10 Holdings
This means that the top 10 holdings account for one-third of the index, and if you expand your view to include the top 25 holdings, they together make up 46% of the index. Become.
Combined, the annual profits of the seven Magnificent companies exceed the profits of publicly traded stocks in every country except China and Japan.
This may seem unusual, but this is evident in other markets as well. Let's take China as an example.
The top 10 stocks account for over 57% of the index, and the top 5 stocks account for almost 38% of the market capitalization.
It is important to recognize that such high concentrations can be risky and could ultimately result in a significant market correction. Many people may find it difficult to admit it, but it will happen at some point.
The , which acts as a barometer of market sentiment, is currently indicating a sense of calm among investors and remains well below the 20 level.
The overconfidence among investors that prevailed at the end of 2023 has continued into this year.
There appears to be an inverse correlation between the stock market and the VIX. When the VIX is at low levels, stock prices generally rise and vice versa.
However, it is important to note that statistically these low levels often precede bearish reversals in the market.
The question arises, why? There is an inverse relationship between volatility index and investor sentiment.
Historical data shows that long periods of low readings have led to increased volatility, followed by moments of stock price retracement.
Additionally, the VIX's seasonal fluctuations tend to spike from mid-February to March, raising concerns about the possibility of stock market declines.
The key variable is the size of the possible retracement, which is currently overshadowed by the higher market highs.
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Disclaimer: This article is written for informational purposes only. This does not constitute an investment solicitation, offer, advice or recommendation and is not intended to encourage the purchase of any assets in any way. We would like to remind you that investment decisions and associated risks are borne by investors, as any type of asset is evaluated from multiple perspectives and is highly risky.
