Beware These 10 Signs of a Market Top
Hedge fund legend David Einhorn thinks he just received the “clinching sign” that the top of a tech-heavy bubble is here…
That sign was a job application from someone looking to join his Greenlight Capital hedge fund.
As Einhorn explained in his third quarter letter to Greenlight’s investors, the job application came in an email with the subject line, “I am young, but good at investments…”
It was sent by a 13-year-old boy who claimed to have quadrupled his money since February.
I recently told you how Joe Kennedy avoided the 1929 stock market crash after receiving a stock tip from a shoeshine boy.
Kennedy decided that when shoeshine boys start giving stock tips, it is time to get out of the market.
Einhorn’s story sounds similar…
When teenagers start crushing the market and applying for jobs at hedge funds, it may be time to sell.
The Warning Signs of a Tech Bubble
Like Einhorn, I’ve been warning about Big Tech names, special purpose acquisition companies (SPACs), electric vehicle companies and profitless momentum stocks recently.
And in his third quarter letter to Greenlight Capital investors, Einhorn lays out a list of new warning signs…
- Initial public offering mania
- High valuations and new metrics for valuation
- Market concentration in a single sector and a few stocks
- S&P 500-type market capitalizations for second-tier stocks that most people haven’t heard of
- A situation where the more fanciful and distant the narrative, the better the stock performs
- Outperformance of companies suspected of fraud based on the belief that there is no enforcement risk, without which “crime pays”
- Outsized reaction to economically irrelevant stock splits
- Increased participation of retail investors, who appear focused on the best-performing names
- Incredible trading volumes in speculative instruments, like weekly call options and worthless common stocks
- A parabolic ascent toward a top.
Like Einhorn, I have my eyes wide open to the risk that the bubbly areas of the market present.
We also know that opportunities exist in other areas of the market…
When You Hear From Me Next
I am an avid reader of the quarterly letters from the top investors like Einhorn. I watch what these super-smart folks are buying and selling.
After I read Einhorn’s third quarter letter, I read a letter from another elite investor who is sounding the same warning signal.
When these smart guys start cautioning the same things, we should pay attention.
This other investor, however, is also pounding the table on a sector of the market that he believes represents a generational buying opportunity.
As is often the case, risk in one area of the market opens up opportunity in another.
When you next hear from me, I’ll name that other investor and lay out exactly which sector he thinks is appealing and why.
Until then…
Good investing,
Jody
