Tech Sector Sell-off?
The exclusively astronomic rise of Amazon and Netflix much more than the other tech sector stocks in the S&P 500 sparks worries of a sell-off.
In investing and online stock trading, it pays to consider future scenarios based on instances from the past and the wisdom of analysts.
Astronomic Rise of $NFLX and $AMZN Remind Us of Dotcom Bubble
If prices of stocks keep rising astronomically and swiftly, will they reach a point when it all collapses through a selloff? The Dotcom Bubble of the late 1990s was an example of this. After the soaring high prices came the crash in the early 2000s, which usually happens because investors suddenly realize they were regarding some stocks too highly. So, is there a similar situation brewing now? According to CNBC, Netflix ($NFLX) and Amazon ($AMZN) have their stocks rocketing so fast and touching record highs that analysts and investors fear danger of a collapse. Among those who fear this is Michael Bapis of the wealth management practice The Bapis Group.
A Pullback Is a Possibility
Bapis feels that with Amazon and Netflix having ruled the markets for nearly three years, it is natural to experience a pullback. These concerns were echoed by Piper Jaffray’s Craig Johnson, CNBC reports. Jaffray raises the point that the new highs for Netflix and Amazon are coming at a time when the other indices aren’t experiencing such highs. The “narrow market breadth” is of concern for him, and he considers it unhealthy for the market overall. Short sellers are getting attracted to Netflix too, with Citron Research’s Andrew Left believing Netflix can get shorted to $300 per share.
The CNBC report states that through the March 12 opening, Amazon rose by 36.2% while Netflix soared by 73.8%. The S&P 500, by contrast, advanced only 4.4%. These soaring prices bring with them astronomic valuations. Amazon and Netflix have forward P/E ratios of 155 and 108 respectively while the S&P 500 has only 17. Interestingly, this valuation of the S&P 500 is stretched too, considering historic standards.
Amazon Keeps Investors Hooked with Future Prospects
Bapis is of the opinion that Amazon is a stock not following conventional norms of stock earnings and price-earnings ratios. It would seem really hard to convince yourself to buy a company which trades at over 250 times 12-month trailing earnings and has such a run. But NYU’s professor of marketing Scot Galloway believes Amazon has this ability to keep investors hooked by telling them about future prospects of further growth rather than being concerned about the scant current profits.
Narrow Market Leadership of Tech Sector Stocks Sparks Worry
Investopedia’s Mark Kolakowsky reminds that other investment managers and analysts have already been sounding warnings about the tech stocks’ narrow market leadership. In an index such as the S&P 500 Index ($SPX), which weighs heavily on capitalization, a few stocks causing such a rise raises the risk of the opposite happening. A price downturn for these stocks could cause the whole index to tumble and result in investors selling other shares too, out of panic.
Though Netflix and Amazon are officially consumer discretionary stocks, since their core business involves online entertainment streaming and retail, they are considered tech stocks for their obvious technological capabilities. And, they’re vitally part of the FAANG tech stocks that also include Apple ($AAPL), Alphabet ($GOOGL) and Facebook ($FB). And the gains of these stocks are nothing when compared to what Amazon and Netflix have achieved, Kolalowsky reminds. Through the March 12 open, Apple, Alphabet and Facebook were 7.0%, 10.6% and 5.0% respectively year-to-date as per Yahoo Finance adjusted closing price data quoted by Kolakowsky.
Rather than getting stunned or surprised, it is better to be prepared for any eventuality. This insight isn’t to get you panicked but prepared for what could possibly happen based on past instances and the general working of the stock market. Being prepared means being able to execute quickly. Trade US stocks commission free with TradeZero.
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