Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
Gold Price During Hyperinflation - 12th May 21
Stock Market Extending Phase Two? - 12th May 21
Crypto 101 for new traders – ETH or BTC? - 12th May 21
Stock Market Enters Early Summer Correction Trend Forecast Time Window - 11th May 21
GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
Cathy Wood Bubble Bursts as ARK Funds CRASH! Enter into a Severe Bear Market - 11th May 21
Apply This Technique to Stop Rushing into Trades - 10th May 21
Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
CHIA Getting Started SSD Crypto Mining by Plotting and Farming on Your Hard Drives Guide - 9th May 21
Yaheetech Mesh Best Cheap Computer /. Gaming Chairs on Amazon Review - 9th May 21
Breaking US Trade Embargo with Cuba - Build 7 Computers in 14 Hours Before Ship Sales Challenge - 9th May 21
Dripcoin Applies New Technology That Provides Faster Order Execution - 9th May 21
Capital Gains Tax Hike News: Was It REALLY to Blame for Sell-off? - 7th May 21
Stock Market Transportation Index Continues To Grind Higher - 7th May 21
SPX Stock Market Correction Arriving or Not? - 7th May 21
How to Invest in an Online Casino? - 7th May 21
Gold & Silver Begin New Advancing Cycle Phase - 6th May 21
Vaccine Economic Boom and Bust - 6th May 21
USDX, Gold Miners: The Lion and the Jackals - 6th May 21
What If You Turn Off Your PC During Windows Update? Stuck on Automatic Repair Nightmare! - 6th May 21
4 Insurance Policies You Should Consider Buying - 6th May 21
Fed Taper Smoke and Mirrors - 5th May 21
Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley - 5th May 21
Utility Stocks Continue To Rally – Sending A Warning Signal Yet? - 5th May 21
ROIMAX Trading Platform Review - 5th May 21
Gas and Electricity Price Trends so far in 2021 for the United Kingdom - 5th May 21
Crypto Bubble Mania Free Money GPU Mining With NiceHash Continues... - 4th May 21
Stock Market SPX Short-term Correction - 4th May 21
Gold & Silver Wait Their Turn to Ride the Inflationary Wave - 4th May 21
Gold Can’t Wait to Fall – Even Without USDX’s Help - 4th May 21
Stock Market Investor Psychology: Here are 2 Rare Traits Now on Display - 4th May 21
Sheffield Peoples Referendum May 6th Local Elections 2021 - Vote for Committee Decision's or Dictatorship - 4th May 21
AlphaLive Brings Out Latest Trading App for Android - 4th May 21
India Covid-19 Apocalypse Heralds Catastrophe for Pakistan & Bangladesh, Covid in Italy August 2019! - 3rd May 21
Why Ryzen PBO Overclock is Better than ALL Core Under Volting - 5950x, 5900x, 5800x, 5600x Despite Benchmarks - 3rd May 21
MMT: Medieval Monetary Theory - 3rd May 21
Magical Flowering Budgies Bird of Paradise Indoor Grape Vine Flying Fun in VR 3D 180 UK - 3rd May 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

With This Extent of Passive Investing, Even a Minor Correction Will Be Disastrous

Stock-Markets / Investing 2017 Jun 15, 2017 - 06:17 AM GMT

By: John_Mauldin

Stock-Markets

Last week, Doug Kass sent around an e-mail comparing today’s markets to Queen’s classic “Bohemian Rhapsody.” I know that seems odd, but it was actually a good fit.

The point is that, like the song says, “Nothing really matters” to whoever is buying stocks these days.

They just keep buying and pushing prices higher. Stock prices do go higher in a bull market, and sometimes, as the end approaches, they make value investors very uncomfortable.


Neither Doug nor I quite understand the “Nothing really matters” attitude, though we have some theories. Doug is probably more bearish than I am. He has a long list of open questions. I zeroed in on one, which is critical: When ETFs sell, who will buy?”

Passive Investing Is Taking Market Distortions to New Extremes

The enormous extent of passive indexing has side effects that I suspect will make markets sick at some point. Passive investing distorts the financial markets’ core economic function, i.e., efficient capital allocation.

In terms of stimulating buying interest, a company’s fundamental business prospects are now much less important than its presence in (or absence from) popular indexes.

We’ve created this environment in which badly managed companies can still see their stock prices rise along with those of well-managed companies. The actual facts about a company don’t mean all that much in a passive-investing world.

Capitalization-weighted indexes aggravate this already problematic phenomenon.

Money is pouring into stocks like Apple (AAPL) and Amazon (AMZN) simply because they are big. The resulting higher prices make them bigger still, and they pull in yet more capital. Here’s a look at the five largest stocks in the S&P 500:

  • Apple: 23%
  • Alphabet: 9%
  • Microsoft: 6%
  • Amazon: 20%
  • Facebook: 25%

What about the QQQ or the NDX?

The five stocks above represent 42% of the NDX and 13% of the S&P 500.

That means every time you buy an index based on the NASDAQ, 42% of your money goes into just five stocks, leaving 58% for the remaining 95.

By the time you get past the largest 25, you are under 1% per stock. Apple alone is 12% of the NASDAQ 100 Index and 4% of the S&P 500. That explains, in part, why the NASDAQ has outperformed the S&P 500.

In This Environment, Even a Minor Correction May Be Disastrous for Stocks

Be careful out there.

Doug asks, When ETFs sell, who will buy?” The ETFs of the world may quickly begin trading below their actual net asset values (NAV). This is called “price discovery,” and the arbitrageurs will not be slow to take advantage of that difference.

This means the indexes will drop much faster than they have gone up. I am neither a fortuneteller nor the son of a fortuneteller, but there are a few things I’ve picked up along the way. One of them is that, next time, stocks are going to go down breathtakingly fast once they begin to roll over.

This bull can’t end well, but it will end. At that point, Doug’s question becomes critical: Who will buy? I don’t know, but someone will. Prices for good and bad stocks will drop to whatever levels attract buyers.

The indexes will eventually fall lower than any of us think likely right now. Whether that will happen next month, next year, or next decade is anyone’s guess.

As a side note, you should think of cash as an option on your ability to buy the stocks that will lose 50% of their value and suddenly become the value stocks of the future.

The option value on your cash today is not that much. You don’t make much on it, but you don’t lose much holding it. The time is going to come when you will be glad you have a little cash to put to work.

Think March 2009.

Get a Bird’s-Eye View of the Economy with John Mauldin’s Thoughts from the Frontline

This wildly popular newsletter by celebrated economic commentator, John Mauldin, is a must-read for informed investors who want to go beyond the mainstream media hype and find out about the trends and traps to watch out for. Join hundreds of thousands of fans worldwide, as John uncovers macroeconomic truths in Thoughts from the Frontline. Get it free in your inbox every Monday.

John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in