Tipping Point (Part 2): The Four Horsemen Of The Nasdaq Collapse.
Trending markets are typically characterized by “Uniformity”, or the tendency for gains or losses to be spread fairly evenly across a broad number of the market’s components. At an Inflection Point, a higher proportion of issues begin to participate with the new Emerging Trend and fewer with the existing, Maturing Trend. Over time, the Emerging Trend will ultimately establish itself as dominant while the Maturing Trend withers into its completion.
These forces can be quantified. A number of analysts have attempted to correlate the dominance of certain Mega-Cap Technology Stocks to the performance of both the Standard & Poor’s 500 and Nasdaq. (The most popular acronym for the elite Mega-Caps is “FAANG”, or Facebook, Apple, Amazon, Netflix, and Google. ) The selection criteria used by analysts may include, or not include, certain issues. Let’s make this easy.
According to the website Macro Trends (https://www.macrotrends.net/), as of August 20, 2018 there were 4 companies on the Nasdaq whose Market Capitalizations exceeded $800 Billion. No other publicly traded company is even valued above $500 Billion except Facebook at $505 Billion. The Four Mega Caps, along with their Market Capitalizations, as of August 20, 2018 were Apple (AAPL) $1.059 Trillion, Amazon (AMZN) $942 Billion, Google (GOOGL) $913 Billion, and Microsoft (MSFT) $826 Billion. Together, these “Four Horseman” currently total $3.74 Trillion, nearly 25% of the value of the entire Nasdaq’s 3900 issues of $15.49 Trillion.
Since January 1, 2017, the Nasdaq has had an increase in total Market Capitalization of $4.06 Trillion ($11.43 to $15.49) of which 41%, or $1.65 Trillion was contributed by these 4 largest companies. However, since July 1, 2018 the Four Horsemen alone have accounted for a stunning 73% of the Nasdaq’s rise. This change from 41% to 73% is a clear and quantitative measure of the tendency of a Maturing Trend to lose its “Uniformity” as a smaller proportion of components account for a greater portion of an index’s gain.
We can gain further insight by looking more closely at these 4 issues and assessing the likelihood that the existing Trend can be further extended.
Three of the Four are completing distinctively BEARISH patterns. Both GOOGL and MSFT have recently violated their Parabolic Up Trends, the signature of the ending of any Asset Bubble. Once the price starts rising nearly vertically, it reaches a point of exhaustion, and anyone failing to act will suffer the financial consequences. As an example, virtually, every Cryptocurrency traced out very similar Parabolic Up Trend lines peaking in early January 2018. Since then, they have collapsed on average by about 75% (https://markonomics101.com/2018/08/11/tipping-point-part-1-cryptocurrencies-continue-2018-collapse/).
AMZN is tracing out a VERY BEARISH Ascending Wedge pattern. These patterns are almost always Terminal, in similar fashion to a Parabolic Up Trend, because they slope steeply higher. The steeper the slope, the more likely they are to Break Down rather than Up, since Up requires nearly vertical price rises. Only on a very rare occasion, does an issue Break Up from an Ascending Wedge. One example is AAPL, which is the only one of the Four to remain in a BULLISH pattern.
While one can’t rule out some additional upside as a few more issues forge ahead, the Nasdaq ought to follow the same path as Cryptocurrencies or even the Nasdaq itself traced out after the 1990-2000 Bull Market. That Nasdaq of the Internet Bubble Era had nearly identical Parabolic price patterns and was followed by an 85% loss from peak to trough. There is very little reason not to believe this same fate awaits the current Bubble led by the “Four Horseman of the Nasdaq Collapse”.