Is the Tech Sector Signaling a Bubble?

Today’s Market Update

It turned out to be a lackluster day, but there was some nice news from the auto sector. The festive season started yesterday and on the very first day, sales numbers looked quite strong.

Reports from Maruti, Hyundai and Tata Motors were encouraging, and it seems that consumption is going to be the big theme going forward. The pent-up demand for white goods and automobiles, along with GST rate rationalization from yesterday, is expected to further support demand for consumption goods.

On the other hand, the negative theme continued in the IT sector where uncertainty remains. There are still questions about how IT companies will deal with the H1B visa issue.

• Looking at the charts, this was the fourth day in a row that Nifty remained in a sulky mood, closing 0.13% lower.

• Nifty Junior, however, lost 0.46%, Midcaps were down 0.29% and Smallcaps fell 0.52%. These were mild losses and nothing too worrying.

• Nifty Bank, in contrast, perked up with a 0.41% gain for the day.

• Gold continues its relentless bull rally, gaining another 1.5% today. Prices are now at 11,443 per gram, more than double from 5,500 just 18 months ago when gold was at 55,000 per 10 grams. At every stage, people thought gold had run up too much, but it kept proving them wrong.

Other Market Triggers

• Most of the Nifty heat map was red, led by FMCG. This was surprising because the broader theme had been consumption stocks, yet FMCG fell.

• UltraTech Cement slipped 2%, Tech Mahindra, HCL Tech, Infosys and TCS also saw mild declines. Life insurance companies continued to bleed as margins are being squeezed after the GST exemption for consumers, which prevents insurers from claiming input credits on their expenses.

• On the positive side, Axis Bank, Kotak Bank, SBI and Bajaj Finance had a good day. The banking space seems to be undergoing a churn with private banks losing some ground to PSUs.

• Power stocks also looked strong, while Reliance remained flat.

• In the Nifty Next 50 space, there was profit taking in Adani group stocks which had rallied recently. Godrej Consumer Products fell 3%, Indian Hotels also dropped, along with Naukri.

• Pidilite, which went into a split or bonus, was in focus. Jindal Steel rose 2.9%, BPCL and Motherson also gained, while capital goods saw mild losses.

• The mover of the day was Tata Investment Corporation, which surged 12% after announcing a split of its equity shares. The stock has already climbed from 6,800 to 8,100 recently.

What to watch next ?

• So the fact that the market is holding up despite negative cues is actually positive.

• Regarding Gold, International commentary is even suggesting that it could touch 5,000, 8,000 or even 10,000 dollars an ounce.

• The monetary system itself is going through a big change, and it will only be clear in hindsight how deep this change really was.

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What To Read This Week ?

Is the Tech Sector Signaling a Bubble?

Based on data from DSP Netra, the current technology market capitalization relative to the total MSCI market capitalization stands at a significant 35%. This high concentration is largely attributed to the surge in AI stocks and draws a striking parallel to the dot-com era, where the same metric reached 36% right before the bubble burst.

This proximity to historical highs serves as a powerful reminder of past market volatility and raises the question: are we entering dangerous territory?

A Different Kind of Climb

While the current concentration mirrors the dot-com peak, a closer look at the trajectory reveals a different story. The dot-com run was a "vertical rise," with the tech concentration climbing from 10% to 36% in a mere five years. In contrast, the current surge has been a much more gradual ascent, moving from a 5% concentration to 35% over a period of 13 years. This slower climb suggests the current market structure may be more fundamentally supported.

Playing devil's advocate, the market has sustained a concentration above 30% for the last three to four years without a major capitulation. This implies that the 36% figure is not a sacrosanct limit, and the concentration could potentially rise even higher.

Pointers for Navigating the Market

Regardless of whether a bubble is forming or not, the key lesson is the importance of having a clear, pre-defined strategy. Waiting until a stock has dropped significantly and hoping for a 20-year recovery is not a viable plan.

The only effective countermeasure is to have a set of rules for when to act. This can be based on a predetermined satisfaction level, a specific technical indicator, or a fundamental change in the company's outlook. When that rule is triggered, you must be prepared to execute your plan without hesitation.

Key Takeaways:

• Concentration: The technology sector's market cap concentration is at 35%, closely mirroring the 36% peak of the dot-com bubble.

• Trajectory: Unlike the rapid, five-year vertical rise of the dot-com era, the current concentration has been built over a more gradual 13-year period.

• Strategy is Key: It is essential to have a pre-defined plan to get out of a position, rather than waiting for a major drop and hoping for a long-term recovery.

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