All About Tech

In my last post on Tuesday morning I was again looking at the stats (based on fourteen previous instances in the last eighteen months) for what was likely to happen after the hit of the daily 3sd lower band last Thursday. They are as follows:

• 9x delivered a rally that broke back over the daily middle band.

  • of which five delivered new all time highs.

• 1x delivered a decent rally that peaked on the third trading day

• 2x delivered a decent rally that peaked on the next trading day

• 1x delivered a decent rally that peaked on the second trading day

• 1x delivered two more days of 3sd lower band tests into a big swing low

Today is the fifth day after the hit, new rally highs were made yesterday and today, so we are clearly on the track of the first nine results that delivered a break above the daily middle band, five of which delivered a new all time high on SPX.

On Tuesday I was saying if the rally made new highs after day three then I’d be leaning towards seeing at least a backtest of the daily middle band on SPX and we saw that yesterday, with the close yesterday slightly below it.

So what now? Well I was saying in my post on Wednesday 4th November that any strong rally would need to be ideally led by Tech, or at minimum participated in by Tech and, so far at least and even with serious trouble at NVDA, Tech has led this rally.

On SOX the high yesterday was at a test of the daily middle band and the high yesterday on QQQ was close to it. In that respect, so far, so good.

SOX daily chart:

Is there an obvious path higher from here? I was going through this last night on my Wednesday The Bigger Picture video and was looking at possible IHS patterns that might form on SOX and QQQ today that could deliver another strong move up. So far today those IHS patterns have been forming and if they break up and reach target, will take this rally well over the daily middle bands on both SOX and QQQ.

On SOX a good quality IHS has now mostly formed and a sustained break up over the IHS neckline in the 10,800 area would look for a target in the 12,600 area. If seen that would be a hard break back over the daily middle band and would get SOX within easy range of bigger picture bull flag resistance, currently in the 12840 area.

SOX 60min chart:

On QQQ a good quality IHS has now mostly formed and a sustained break up over the IHS neckline in the 695 area would look for a target in the 746 area. If seen that would be within easy range of a retest of the all time high.

QQQ 60min chart:

How much of a drag will NVDA’s troubles be on this? Short term the damage is likely mostly done. NVDA has already fallen almost 40% from the all time high into this morning’s low at 148.80 and much of that fall happened this week without derailing the overall rally on Tech.

Will NVDA go lower? Well I’m expecting to see a decent rally soon but in the short term I’d note that NVDA has not yet reached the clear double top target in the 136 to 143.5 range.

NVDA daily chart:

The daily middle bands on all of SPX, QQQ and SOX are important resistance and an obvious failure level. Equally if they all break back over their daily middle bands and can hold above for a couple of days, those will be solid bullish breaks. If SOX and QQQ reach those IHS targets, the odds look better than even from here that SPX will already have retested the all time high. The high on SPX yesterday was already well over 50% of the way back from last week’s low on SPX at 7350.35 to the current all time high at 7848.70.

I’m doing a three part series on the (likely) AI bubble and published the first instalment this morning. If you missed it you can see that here.

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The Bigger Picture on the AI Bubble Part 1 of 3

I was promising a post on why the AI bubble is very likely a speculative bubble last week and I’ve been giving that some thought. The subject is too large really to fit into one post really so I have decided to split this into three posts as follows:

1. Why is there likely a speculative bubble in equities here, and why is it a bubble in AI?

2. Why is the AI bubble likely within a year or two of bursting, and which Tech companies are most likely to survive the bursting of the bubble?

3. How have speculative bubbles in equities topped out in the past?

The first thing to say here is an important caveat that I avoid words like certain or definite when talking about markets. There is little certainty in the world and even less in the markets. There is always a chance that even if something walks like a duck, looks like a duck and quacks like a duck, that it might turn out nonetheless not to be a duck. There is a equally always a chance that things might actually be different this time, even when that will generally turn out not to be the case.

Why is there likely a speculative bubble in equities here?

The chart below shows the the six times in the past two centuries when a small number of big companies has grown to a very large percentage of overall US market capitalisation. The previous five and the current spikes were and are:

1. Railways - Panic of 1857

2. Utilities/Telco/Industrials - 1929 Crash

3. Nifty Fifty - 1973/4 Crash

4. Japan as % MSCI ACWI - 1987 Crash

5. Tech/Media/Telecom - 2000 Crash

6. AI Big 10 (Mag 7 + Broadcom, AMD & Micron) - 2027-8 Crash?

This is a very strong indicator of a speculative bubble in stock markets here.

The history of stock market bubble concentration 1835 - 2026:

The Shiller PE Ratio is a Cyclically Adjusted Price to Earnings Ratio (CAPE) developed by Yale Economist Robert J. Shiller. It divides a market index’s price (usually the S&P 500) by the average of the past ten years of earnings, adjusted for inflation. It can also be used for individual stocks and is principally used to assess likely future returns from equities on timescales over 10 to 20 years, with higher than average CAPE values implying lower than average long-term average returns.

This is a very well respected and widely used valuation measure and there have been four big previous highs since the start in 1872 on the chart below. The Schiller PE after those highs performed as follows:

• 1901 high at 25.2 to 1921 trough at 4.8 (81% decline)

• 1929 high at 32.6 to 1933 trough at ~5.5 (83.1% decline)

• 1966 peak at 24.1 to 1982 trough at ~7 (70% decline)

• 2000 peak at 44.2 to 2009 trough at ~13.5 (69.5% decline)

The current high on the Schiller P/E reached 42.4 in August 2026 and hasn’t much higher to go to make a new all time high over the 2000 high at 44.2. Does this look like a major speculative bubble is currently in progress? Very much so, and the bubble high may well be close. All four of the last declines after the high made troughs below, and usually well below, the historical mean at 17.41. The smallest subsequent decline in CAPE was 69.5% and the largest was 83.1%. There’s no reason to think the next downcycle will be any different.

Shiller PE Ratio (CAPE 1871-2026:

The Buffett Indicator, also known as Market Cap to GDP was referred to by Warren Buffett in 2001 as ‘probably the best single measure of where valuations stand at any given moment’. The calculation is the total market value of all publicly-traded stocks in a country by the country’s Gross Domestic Product (GDP). The ratio provides an insight into the relative valuation of the market.

On the Buffett Indicator, with a mean in the 90% area, the first break over the mean since 1970 was in the dotcom bubble, reaching a high in the 140% area in 2000, then falling to a trough in 2009 in the 52% area. As of today this indicator is at 228.4, putting the current market well over 50% higher than the high in 2000. This is far into previously uncharted bubble territory.

Wilshire 5000 to GDP Ratio 1970 - Date:

Market Breadth is a measure of how many individual stocks participate in market moves rather than relying solely on a small group of mega-caps. Near market highs this tends to go down as price gains become more concentrated in a smaller number of stocks, and near market lows this tends to go up as gains become spread over a larger number of stocks.

I only have this chart going back to 1985 but you can see significant lows at -11% in 1987 (36% decline in 1987), -16.5% in 1990 (20.5% decline in 1990), then a huge low at -20% in 2000 (49.5% decline into 2002), a low at -9.5% in 2007-8 (57.75% decline into 2009), with further lows at -10.5% in 2017 (20.5% decline 2018), ~12% in 2020 (35.5% in 2020), -14% in 2022 (27.5% decline 2022) and the current low at about -15% the second lowest reading since 1990.

Hard to say whether this is in bubble territory, though it is at the lowest level on this chart other than the big low in 2000. Any level in the -10 area or below though is warning at minimum of a likely significant high forming.

S&P 500 52-Week Market Breadth 1985 - Date

Why is this a bubble in AI particularly?

This one is very simple. You follow the money. In a bubble the market concentrates into particular sectors and in recent years, that concentration has been into the Tech & AI majors.

There’s also net investment, which concentrates in the bubble sector(s). That concentration is the current investment pouring into data centres.

Net Investment (S&P 500 Capital Expenditures Less Depreciation) / Nominal GDP 1992-Date:

It’s relatively simple to see a bubble forming, but much harder to call where it tops out. As and when it does top out though, the aftermath isn’t pretty:

I’m expecting to have the next post in this series of three out on Friday and that will be looking at why the AI bubble is likely to be within a year or two at most, and which Tech companies are most likely to survive the bursting of the bubble.

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