ChartBrief 61 – S&P Sector Bubble Watch

ChartBrief 61 – S&P Sector Bubble Watch

With all the talk of market bubbles and comparisons to the year 2000 and the dot-com mania, it’s worth taking a look at an interesting chart that showed clear signs of market mania toward the peak of the last two major market cycles.

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The chart, which appeared in the latest edition of the Weekly Macro Themes, shows the relative weighting (based on market capitalization) of a selection of major S&P 500 sectors.

The reason I chose not to display the other sectors is simply because none of the other major GICS sectors have done what these major stock market sectors have. And that is, show signs of a bubble.

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Sector Bubble Watch

The tech sector is by far the most dramatic standout, spiking to extreme highs at the peak of the dot-com mania. The next interesting one is the financial sector which went from around 10% to over 20%.  Energy was likewise interesting, going from around 5% to 15% at it’s peak.

The reason I included healthcare (thinking, in particular about biotech and pharma), is that it was probably the closest thing in more recent times to the type of “sector bubbles” seen in tech and financials. But the movement is nothing like that of the previous 3.

So why would you look at sector weights and indeed why would you try to find sector bubbles?

The main reason is it is one of many potential signs of things getting out of hand at a market top.  To be fair, you can get a market top where *everything* gets bid, but the experience has been that for things to really get out of hand there usually is some sort of “story”.  A “mega trend” or “structural shift”.

In 2000 it was the “new economy” – but at present there is yet to be a real story to inspire the retail money to really make the final dash into the market and give the bull market its final rush. There’s no guarantee we will get a story, but if and when we do it will probably show up on the charts.

If interested, check out my Weekly Macro Themes – you can request a trial here.


Article by Callum Thomas, Topddown Charts

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Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.
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