Legendary investor William O’Neil influenced a generation of highly skilled investors, including top stock pickers who have been featured in Jack Schwager’s Market Wizards book series.
One of O’Neil’s disciples, David Ryan, featured in Schwager’s "Market Wizards: Interviews with Top Traders," recently issued a warning that technology investors may not want to dismiss.
Technology stocks rally could be over
Last year, nobody expected that stocks would surge higher in 2023. Inflation was rampant, yield curves were inverting, signaling a recession, and money was rushing from stocks into the relative haven of money markets, certificates of deposit, and short-term Treasury bonds.
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Yet, that’s precisely what happened. Stocks have marched significantly higher since last October, led by technology stocks that many investors had left for dead.
The technology-heavy NASDAQ 100 is up 37% year-to-date, and the SPDR technology ETF (XLK) -) has gained 35%. Returns for many technology stocks have been much better. For example, chipmaker Nvidia (NVDA) -) has ridden a wave of AI interest to return 214% in 2023.
That's impressive. Unfortunately, Ryan isn't convinced these stocks have more room to run. In a post on Elon Musk’s social media platform X (formerly Twitter), Ryan offered a blunt and worrisome takeaway on technology stocks.
The QQQ has seen it’s high for the year on 7/19/23. NVDA’s earnings mark the final move in tech. Raise cash and get defensive.
— David Ryan (@dryan310) August 24, 2023
Ryan’s prediction that the NASDAQ has peaked and investors should raise cash is particularly noteworthy because he won the U.S. Investing Championship three years in a row in 1985, 1986, and 1987, and unlike many, he posts infrequently.
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For example, before his August 24 warning, he hadn’t posted on X since July 14, when he admitted he’d missed the rally because he was struggling with his father’s loss and O’Neil’s passing. He said he expected stocks to stall following “2-to-3-week climatic moves” in technology leaders: Nvidia and Meta Platforms (META) -).
Meta Platforms stock was up 157% year-to-date when Ryan made that comment. Since then, its shares have fallen 8%. Nvidia's stock retreated earlier this month before reaccelerating ahead of its blockbuster second-quarter earnings. While those earnings results were far better than analysts had expected, Nvidia’s stock price is trading below where it was before the report.
If recent weakness in these technology titans is a harbinger of additional losses, the NASDAQ 100 would be hit hardest, given technology stocks account for 57% of its holdings.
The broader S&P 500 stock index won’t be as negatively impacted because technology makes up a smaller proportion of its stocks. However, it could still face an uphill climb, given technology accounts for about 28% of its holdings.
Ryan isn’t alone in his concern that this year’s best returns are behind us.
Hedge fund manager Doug Kass recently wrote in his Real Money Pro trading diary that there’s a 75% chance that we’ve already seen this year’s stock market highs.
Kass, a self-described contrarian with a calculator, is concerned that technology stocks rally has lifted the S&P 500’s valuation to untenable levels. The price-to-earnings ratio (P/E) of the benchmark index is about 19, and historically, future gains are more elusive in the year following a P/E ratio above 18.
Given investors can collect over 5% yields in money market accounts, Kass believes there’s little incentive to take on the risk of paying top dollar to own already pricey stocks.
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