There’s no shortage of evidence that the stock market’s biggest winners, and more importantly the high-momentum winners, have been concentrated among technology shares — Netflix alone has run up to a series of record highs in the past few weeks and its stock, sitting just shy of $400, has more than doubled so far this year.
But here’s one indicator that shows the relationship between big movers and tech-sector exclusivity hasn’t been this tight since the lead-up to the dot-com implosion, says Jim Paulsen, chief investment strategist with the Leuthold Group.
Paulsen is watching the rolling one-year correlation between the daily relative price performances of the S&P 500 technology sector index
and the MSCI USA Momentum Price Index
, which recently rose to its highest level since late 2000 (shown below). The momentum index tracks large- and mid-cap stocks with high price momentum but also high liquidity, ample investment capacity and minimum turnover. Microsoft Corp.
and Amazon.com Inc.
are big constituents but financials and pharmaceuticals are part of its makeup as well.
Tech concentration is apparent in performance numbers. Tech stocks make up about 26% of the S&P 500 index’s
market capitalization, but in the past year account for almost 43% of the top 100 stock performers based on market capitalization. That is, the tech sector is about two-thirds more strongly represented among this portfolio of 100 winners than across the whole S&P 500, 43% compared to 26%.
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The concentration is even more pronounced if two popular names, Netflix
and Amazon, are moved from their official home in the consumer discretionary category to the tech sector that they’re usually informally lumped with. With these two, “technology” comprises almost 60% of the winners’ portfolio in the past year, almost two times its weighting in the overall index.
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By comparison, at the peak of the dot-com boom in March 2000, tech stocks comprised about 68% of the winners’ portfolio in the previous year. That was also about two times the weighting of tech stocks within the overall S&P 500 index back then, which was about 35% of the overall index.
There are some differences between then and now.
“The valuations of S&P 500 technology stocks and the overall stock market are not as extremely priced today as they were at the top of the dot-com mania,” says Paulsen. “However, momentum within the stock market has again become synonymous with owning popular technology names — suggesting the investment culture (and its potential reward, as well as its risk) rhymes a bit with the great 1990s bull run.”
There are factors at work now that weren’t necessarily in the mix then, either. For instance, the “exclusive” tech club isn’t entirely immune to the trade tensions that are taking a bite out of the broader market. Service tech stocks, especially the FAANG group of Facebook Inc.
, Apple Inc.
, Amazon, Netflix and Google parent Alphabet Inc.
may be less directly affected by rising trade restrictions than U.S. tech firms in general, but they are highly cyclical and exposed to a slowdown in growth should a trade war trigger an economic pause.
Read: Highflying tech stocks hammered by China fears
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There’s also a calendar factor that’s likely to prop up tech stocks even more, potentially making investor hoarding in this area all the more perilous if market conditions turn. Netflix and Amazon, as well as Tesla
and Apple, are all widely held and are frequent headline generators, which means they are much more likely to be bid up until the quarter comes to an end in so-called “window dressing” by fund managers that are hoping to put some polish on a performance nicked by the trade-related retreat, writes Thomas Kee, Jr. for MarketWatch.