The Internet boom was just getting started in the mid-1990s…
The tech-heavy Nasdaq 100 Index closed around 570 in December 1995. And by March 2000, it had surged to slightly more than 4,800. That’s a roughly 725% gain in four-plus years.
At the time, as a young broker, I was flying high along with the markets. I worked 12-hour days. And I thought I knew everything.
However, as it turned out… I didn’t. Nobody does.
Sure, I worked hard. But in the end, the market worked me over like everyone else.
By the time tech stocks started turning lower in the early 2000s, I was a sales trader. And I remember what a struggle it was to go to my desk each day…
Stocks were coming off one of their biggest runs higher in history. And as a relatively new trader, I was doing what I could to help my clients during a period of high volatility.
But I could’ve done more…
You see, if I knew what to look for, I could’ve helped them avoid a lot of the “tech wreck.” In the second week of August 2001, the Nasdaq 100 triggered a signal. And I missed it.
The reason was simple… I was looking at the wrong chart.
This signal popped up on the ratio chart of the Nasdaq 100 against the SPDR S&P 500 Trust (SPY). And after triggering the signal that August, the Nasdaq 100 fell another 50%.
This is an important lesson right now…
That’s because the Nasdaq 100 is once again giving us the same signal. And I’m not going to miss it this time.
I first wrote about a so-called “death cross” unfolding on this ratio on November 10. A little more than a month later, it has now triggered.
And unfortunately for investors, this signal is about as clear as it gets. It tells us that serious risk remains ahead in tech stocks…
The Nasdaq 100’s first crash started in March 2000. After hitting an intraday high of about 4,816 on March 20, the index fell to around 2,900 that May.
A brief rally ensued. But in November 2000, the Nasdaq 100 finally broke the previous low.
That led to a series of “lower highs” and “lower lows” for nearly two years. In October 2002, the Nasdaq 100 finally bottomed at around 800. It had fallen about 83% from its peak.
That brings us to what’s happening today with the Nasdaq 100…
The index climbed as high as around 16,500 late last year. It’s trading at about 11,200 right now. That’s a roughly 30% decline.
And yet, tech stocks are still overpriced. Consumer-electronics giant Apple (AAPL), for example, continues to trade at a price-to-earnings (P/E) ratio of nearly 23.
That might not seem high because we’ve been programmed in recent years to think P/E ratios like that are normal. But Apple’s five-year earnings-per-share growth rate is only about 1.1%. So the business will need a huge jump in growth to justify that P/E ratio.
Also, Apple makes up more than 14% of the Nasdaq 100 today. Back in May, the stock only accounted for 7% of the index.
And today, the whole index is at a turning point. You can see what I mean on the ratio chart that I mentioned earlier…
Now, this weekly ratio chart is a little different from what we normally cover in this publication. But I want you to notice one important takeaway…
Today’s setup is eerily similar to the “death cross” that happened in August 2001.
As I said, we’ve covered a death cross before. It typically occurs when an asset or ratio’s 50-day moving average moves below its 200-day moving average. Since we’re using a weekly chart, we’re instead referring to the 50-week and 200-week moving averages.
Now that this signal is being triggered, we should talk about the potential downside…
I don’t think the Nasdaq 100 will plunge a total of 83% again this time. But I don’t have a crystal ball. So I can’t say for certain what will happen from here.
I also don’t need one, though. The chart shows us everything we need to know…
Put simply, the future doesn’t look good for tech stocks. Avoid this sector for now.
Good investing,
Pete Carmasino
