The Shellacking Continues
It could well be that the divergences between various market sectors and indexes we have recently pointed out will in hindsight be recognized as having constituted a major warning signal. Of course the correction is so far not big enough to make that determination, but it may be worth taking another look at the comparison chart we recently posted:
NDX, Russell 2000, SPX and DJIA compared. We have added vertical lines that align with the peaks in the indexes – as can be seen, they all peaked at different points in time, spread over a lengthy time period – click to enlarge.
Interestingly, we have seen no particular ‘reason’ cited in the media for Thursday’s wave of selling, which is rare and should alarm bulls. It is usually a bad sign when a market declines sharply without there being an easily identifiable trigger event. Usually there is almost always something that serves as an easily digestible sound bite to ‘explain’ the action to us mere mortals.
Here is an update of the ‘safety versus growth’ indicator we showed previously, namely the XLU-QQQ ratio. When this ratio rises, it indicates that investors are rotating out of ‘risky’ growth stocks into ‘safe’ high yielding stocks the earnings of which are considered relatively immune to economic downturns. One could construct similar charts using e.g. tobacco stocks instead of utilities or other permutations on the same theme, but this chart should suffice to make the point:
The XLU-QQQ ratio rockets higher, making yet another new high for the move – click to enlarge.
A Closer Look At Biotechnology
However, we want to take the opportunity to look at a specific sector this time, namely biotechnology stocks. Biotech has been a major upside leader, along with ‘social media’ and other internet stocks and a few other sub-sectors.
In terms of Austrian capital theory, R&D activity is certainly a very early stage of production, precisely the type of business activity that will tend to look more profitable when interest rates are artificially suppressed and at very low levels. It will therefore attract a lot of investment – much of which will later turn out to be malinvestment, as the economy can actually not support all the projects that are initiated in the higher stages of the capital structure.
