In the late 90’s and early 2000’s, the market had a group of four stocks known as The Four Horsemen of the Nasdaq. I have written about them before, but those four stocks were Cisco, Dell, Intel and Microsoft. Today we have the FANG stocks—Facebook, Amazon, Netflix and Google.
All of this nostalgia came back to me in the last few weeks when Facebook and Netflix both issued disappointing news with their earnings reports and the stocks dropped sharply. Back in April ’00, Microsoft issued an earning report where revenue fell short of expectations and that triggered a big tech selloff. The Nasdaq plunged almost 5% on April 24, 2000.
The big fall in Microsoft took the stock below its 52-week moving average and it would start a downward spiral that saw the stock drop 65% from its March high to its December low.
The dramatic drop took the Nasdaq 100 down to its 52-week moving average where it was able to find a little support and then stabilized for the next four or five months, but the bottom fell out later that year.
When we look at Facebook and Netflix and their dramatic declines, only Facebook fell below its 52-week moving average while Netflix is still 21% above its 52-week.
The Nasdaq 100 is still approximately 9% above its 52-week moving average, even after the selling over the last few weeks. The trajectory of the current rally isn’t nearly as steep as the rally in the late 90’s either. Which is also encouraging.
That is where we aren’t seeing the similarities between today and 2000. Sure we have seen a huge run up in most of the FANG stocks, just like we saw from the Four Horsemen almost 20 years ago. But like I said earlier, the trajectory of the current rally isn’t nearly as steep as the one in the late 90’s.
One possible factor that could change all of this would be Apple missing on its earnings report on Tuesday. Apple is the most heavily weighted stock in the Nasdaq 100 at approximately 11%. If it were to suffer a dramatic decline like Facebook or Netflix, it would most certainly drop the index to the point that the 52-week moving average would be in play in the coming weeks.
Another factor that is different from back in 2000 is the investor sentiment. The ratio of bulls to bears on the Investors Intelligence report was hovering near 2:1 back in 2000. In January, the ratio of bulls to bears reached 5:1 and that was the first time since 1987 that the ratio had been that high. I wrote about it for Bull Market Rodeo on January 18, just over a week before the big plunge in January. Since that peak, the sentiment has been falling, but it is still up near the 3:1 level.
Yes there are some similarities to the current bull market and the one we saw come to an end in late 2000. But there are also some factors that are different. The momentum is still to the upside with all four of the main indices remaining above their 52-week moving averages. Yes the sentiment reflects more optimism now than what we were seeing in 2000, but it is falling instead of climbing.
We haven’t seen the yield curve invert yet and that is a good sign. Other popular recession indicators are also not indicating that a recession is coming, at least not yet. One in particular that I like to watch is the Leading Indicators report and the June report showed the biggest increase since February and that suggests that consumers and investors are getting past the big market decline in the first half of the year. These indicators were triggered or would be triggered in 2000.
While the earnings disappointments from Facebook and Netflix may have drawn some comparisons to the dot.com bubble in 2000, I don’t think there is enough evidence to cause investors to worry, at least not yet. Of course we all know that the current bull market will come to an end eventually, but I don’t think it is over yet.