MarketWatch: The Market is in a Huge Bubble
The market is in a huge bubble — but you’d be wrong to bet against it
Published: July 1, 2024 at 7:02 a.m. ET
One sector — technology — is carrying the market.
Jeffrey Bierman, TheoTrade’s chief market technician and an adjunct professor of finance at Loyola University Chicago, warns that the U.S. stock market is in a huge bubble — but it would be insanity to bet against it. Thanks to machine-run algorithms, he points out, technology stocks in particular are rising to unsustainable levels while market breadth is deteriorating.
Specifically, “any technology stock with an AI story is rising too far and too fast,” Bierman says. Individual investors aren’t fueling this bubble, he adds. The algorithms are taking the market higher and ignoring fundamentals.
MarketWatch recently spoke with Bierman to discuss his views in detail. This interview has been edited for length and clarity.
MarketWatch: How would you describe stock valuations at this point?
Bierman: We’re in a bubble in a number of high-profile stocks. Nevertheless, it might not burst for a while. That’s because the S&P 500 Index
SPX0.16% has become a one-sided market with little to no volatility. According to the technical indicator, RSI (Relative Strength Index), anything above 70 is in the danger zone, and we’ve gone way past that. The highest I’ve ever seen RSI on the S&P 500 daily is 88, and it could go to 90 RSI. It’s statistically overshot.
Plus, market breadth is the worst it’s been in years. Combining an extremely overbought market with terrible market breadth is very dangerous. When the algos decide to stop buying and start selling, it could reverse polarity rather rapidly. If that happens, the algos can obliterate the market. We haven’t seen that happen since COVID-19, and then it only lasted a couple of weeks.
MarketWatch: But the market keeps going higher despite the warning signs.
Bierman: Only one sector — technology — is carrying the market. Most traders and investors appear to be selling the other sectors and just buying technology. You know the names: NVIDIA Corp. NVDA0.34%; Apple Inc. AAPL2.65%; Microsoft Corp. MSFT1.39%; Meta Platforms Inc. META-0.23%; Netflix Inc. NFLX-0.37%, plus a spattering of peripheral mega-cap stocks like Walmart Inc. WMT-0.30% and Costco Wholesale Corp. COST-0.49%.
Algorithms are a huge part of this. People are conditioned to chase the story and buy momentum with help from the algorithms. Algorithms are programmed to buy into strength and sell into weakness. The algos don’t buy weakness — people do. Right now, the algos are buying the 52-week highs and selling the 52-week lows.
MarketWatch: There’s often a story stock or stocks the crowd follows. Which is it this time?
Bierman: The market is completely driven by the artificial-intelligence narrative — either a company is producing AI or is offering an AI service. The AI phenomenon has emboldened people into buying mostly technology, regardless of potential risk or value. When people stop doing research, ignore fundamentals and only buy the narrative, you know you’re in a market bubble. Inside of a bubble, fundamentals don’t matter.
The only difference this time is it’s happening at a much faster pace. A lot of this is options-driven. The momentum feeds on itself on what’s called a “positive feedback loop,” going higher and higher. The market is at all-time highs, and continually walking itself higher with little slippage. On the way down, however, it could turn into a negative feedback loop that perpetuates itself beyond investor imagination or risk tolerance.
MarketWatch: Overbought does not mean sell. What could shift market sentiment and sour investors on stocks?
Bierman: This can last for a while, but it can’t last forever. People will likely not sell until the machines walk the market lower. On the way up, few sell. Most investors tend to sell on the way down. It’s herd mentality. In a normal market, stocks may go up for five or six days and then down for five or six days. This market has broken that mold. Nowadays the market may go up for 40 or 50 straight days because of the positive feedback loop. The market is completely detached from the news. It’s the first time in my career where most news is irrelevant. That’s because algos don’t react to news for more than a data-drop split second.
It ends when the market unwinds all of the mega-caps, and in all likelihood, there will be a quick flush to the downside. Right now, fundamental valuations are not much of a catalyst. People also don’t seem to be focused on research. I warn you, however: On the way down, it can become a self-perpetuating nightmare, because the machines can keep the selling pressure on. That’s when investors typically start turning to fundamentals.
MW: Should investors bet against this market?
Bierman: Until the market starts to reverse, it is folly to short it. Anyone shorting this market has gotten decimated. It is an unshortable market as far as I am concerned — unless you’re a masochist. The market has made up its mind it wants to go higher. It doesn’t matter what you throw at it —negative news, interest rates, macro data — it doesn’t care. It’s called “confirmation bias.”
As for me, I am lightening up on the long side. I take gains where I see peak valuations on long positions. But what matters to money managers is that the market is going higher, and they are not paid to miss rallies. Traditional valuation metrics such as inflation, the U.S. dollar and interest rates have given way to performance-chasing. I sarcastically call this a “Seinfeld market” — not much matters except the current narrative or meme. This is the final stage of the bull market. There is no fear. The only fear is the fear of missing out (FOMO). Risk is an afterthought.
Michael Sincere (michaelsincere.com) is the author of “Understanding Options,” “Understanding Stocks,” and the forthcoming “Help Your Child Build Wealth” (Wiley, 2024).