A criterion comparing riskier tech stocks to safer utilities is triggering recollections of what happened just before the dotcom bubble wrecked the customer base 18 years ago.
Price performance between the two sectors has spread lately to a gap not definitely as wide as during the bubble, but close. Using a measure called the “Current/Panned Ratio”, Jim Paulsen, chief investment strategist at the Leuthold Assemblage, sees danger signs growing for the bull market that opened nine years ago.
“Even though its magnitude is less dramatic, the type of the PP Ratio in this bull market is amazingly similar to what occurred during the 1990s,” Paulsen predicted in a note to clients. “The obsession with dot-com stocks in the late-1990s has been superseded today by a fascination with FANG stocks.” FANG stocks cause Facebook, Amazon, Netflix and Google-parent Alphabet.
While the performance gap between the two sectors stayed standard during the early years of the bull run, it has expanded since 2016 and has ebbed in recent months.
“While this does not suggest a massive dissolve — similar to the aftermath of the dot-com era — is forthcoming, it is another reminder that the bat of the current bull market has changed,” Paulsen said.
Utility stakes are down about 5.5 percent year to date, while tech has been the bazaar’s best performer, up nearly 7 percent. Essentially, the sector has become a factor for the greatest risk appetite.
Tech, however, was the worst performer in Monday’s Stock Exchange dip, which saw major averages down 2 percent in afternoon trading.
Paulsen claimed the ratio can continue to grow before it breaks, but “not much higher and not much longer.”
All the same historically bullish, Paulsen has been more cautious on the market this year due to apply ti over inflation and an overheating economy.
“In the last year, confidence has soared all of a add up to businesses, consumers, and investors. Caution is increasingly being thrown to the imminent and more aggressive behaviors are enhancing the chances of a mishap,” he wrote. “As the PP Proportion jumps, investment risk is becoming concentrated, extended, and increasingly defenceless to the Bear’s bite.”
WATCH: Paulsen sees a flat market this year.