A measure that compares the risk of technological actions with the safest public services unleashes memories of just before the dot com bubble destroyed the market 18 years ago.
The evolution of prices between the two sectors has recently spread to a hole that is not as wide as below the bubble but is close. Using a measure called “Popular / Panned Ratio”, Jim Paulsen, chief investment strategist at Leuthold Group, sees danger signs in the bull market that began nine years ago.
PP ratio is similar to what happened in the 1990s
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“Although the size is less dramatic, the nature of the PP ratio in this bull market is surprisingly similar to what happened in the 1990s,” Paulsen said in a note to clients. “The obsession with dot-com actions in the late 1990s has been replaced today by a fascination with the actions of FANG.” Capture shares include Facebook, Amazon, Netflix and Google’s primary alphabet.
The performance gap between the two sectors has increased in recent months
Although the performance gap between the two sectors remained stable during the first years of turbulence, it has widened since 2016 and has increased in recent months.
The shares of public services are around 5.5 per cent so far this year, while technology has had the best performance in the market, almost 7 per cent. In essence, the sector has become a proxy for greater risk appetite.
However, Tech had the worst performance in the market on Monday, with an average of 2 percent in the afternoon operations.
Paulsen said the relationship could continue to grow before it breaks, but “not much higher or much more.”
Inflation and the overheating of the economy
Although historically optimistic, Paulsen has been more cautious on the market this year due to concerns about inflation and the overheating of the economy.
Increasingly vulnerable to the bear bite
“Last year, trust increased among companies, consumers, and investors, with more and more caution being taken and more aggressive behavior increases the chances of an accident,” he wrote. “As the PP ratio is running, the investment risk is concentrating, expanding and increasingly vulnerable to the bear bite.”
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