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Friday, 17 November 2017
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Correction Not Crash

A CORRECTION MAYBE - A  CRASH UNLIKELY

The S&P 500 has been up 43.4% in the last two years and the Dow Jones (not the best index) is up 53.2%. But an index is a bit of a fudge at the best of times, you really need to drill down to sectors to find the overbought areas of the market rather than making judgements about the market as a whole. In the US the obvious observation is that the technology sector has driven this overbought position. The sector has a market cap of US$5.80 trillion which accounts for 24.9% of the S&P 500 index (which has a market capitalisation of US$23.21 trillion) and four stocks account for 15% of the S&P 500 index (Apple, Google, Microsoft, Facebook). The technology sector is up 78.6% in less than two years, which means it has increased by $7.03 trillion in value.

That means the technology sector has accounted for $2.505 trillion of the increase in the S&P 500 which is 35.6% of the rise in the market. Without the rise in the Technology Index the S&P 500 would only be up 27.9% in the last couple of years, which is pretty much in line with our market.

The bottom line is that the froth in the US is in technology. Here is the weekly chart of the S&P 500 Technology Index.

There are 70 stocks in the S&P 500 Technology sector. Here is the top 20. The top 20 stocks account for 83.9% of the Technology Index and the top 5 account for 53.5% of the index.

In other words, if you are worried about the US market, you need to worry about Apple, Google, Microsoft and Facebook. They are the heroes of the market’s performance and they will be the Achilles heel as well.

A “Crash” would require a loss of confidence in the share prices of these big stocks. If, on the other hand,  their share price rises are justified by earnings, we have nothing to worry about. If they are justified by earnings the rest of the US market has merely moved in line with our market.

In the end, a significant market correction would require a loss of sentiment in the big US technology stocks. Is that going to happen? There is no sign of it yet.

BIG US TECH STOCKS NOT THAT EXPENSIVE

So lets look how vulnerable these big US stocks are. I have put in the STOCK BOX boxes below (think I've made all the adjustments for US$). I thought I was going to see PEs of 40-70x. Not so. 

  • Google PE 32.3x dropping to 25.1x.
  • Apple PE 15x dropping to 14.2x.
  • Microsoft PE 24.8x dropping to 22.3x.
  • Facebook PE 30.4x dropping to 26.9x. 

I'll leave you to look at the STOCK BOXES - but note - how many brokers are buyers, the ROE, the price versus intrinsic value, the average broker target prices. The point is that there is nothing hugely overvalued here. These stocks are reasonably priced. Earnings go a long way to justifying the share prices. 

To make the point:

  • 38 out of 43 brokers are buyers of Google.
  • 32 out of 38  brokers are buyers of Apple.
  • 27 out of 34 brokers are buyers of Microsoft. 
  • 41 out of 44 brokers are buyers of Facebook.

There is no "Crash" in the wings here.

 

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