SPY - QQQ: Beware The Concentration Bubble

2024-07-09 09:00:49 ET

Summary

• With fewer and fewer stocks leading the stock market higher and higher, market concentration has reached extreme levels - last observed during the Great Depression.
• In an indication of macroeconomic weakness, small-caps and cyclical sectors are not participating in the ongoing bull run, and poor market breadth signals classic late-cycle behavior.
• Given that mega-cap tech stocks make up more than half of QQQ ETF, a mean reversion trade propelled by an impending earnings slowdown could cause havoc in QQQ.
• QQQ's troublesome technical setup, extreme concentration, and lofty valuations support the idea of an impulsive (long, deep) pullback.

Introduction

With market concentration reaching levels last seen during the Great Depression [1929-1932] and equity valuations sitting at historically elevated levels [S&P 500 ( SPX ) Shiller PE ratio: 36.2x], I think it is imprudent for long-term investors to dismiss the idea of a "Concentration" bubble in the stock market....

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