The stock market is in a bubble.
Actually, that statement is not 100% correct. SOME stocks are in a massive bubble. Other stocks are not even close.
The bubble we are facing today is in large tech stocks.
To prove this, I’m not going to get into the technology itself, nor am I going to try to get clever with discounted cash flows or some other analysis.
Instead I’m going to use the simplest method of analysis possible: mean reversion.
Why? Because price ALWAYS reverts to the mean.
It doesn’t matter how great management is, nor how fast sales are growing, at some point a stock’s price will revert back to its mean.
For the sake of today’s argument I am using the 50-week moving average (WMA) as the “mean.” If you’re unfamiliar with this concept, the 50-week moving average comes from adding up the closing prices of the last 50 weeks and then dividing that number by 50.
Historically, this line has acted as a magnet for stock prices. In the case of large tech companies today, let’s take a look at Apple (AAPL).
As you can see in the below chart, the 50-week moving average has served as an anchor for AAPL’s stock over the last 10 years. Anytime AAPL has become too “stretched” above or below this line, it has reverted back to it… usually quite quickly.
Now, take a look at how far AAPL’s stock is stretched above the line today compared to other peaks. I’ve actually looked deeper here and AAPL is MORE stretched above its 50-WMA today than at any point in the last 10 years with only one exception.
In 2012, AAPL’s stock was 38% above its 50-WMA. That was a peak.
Later in 2012, AAPL’s stock was 21% above its 50-WMA. That was a peak.
In 2015, AAPL’s stock was 12% above its 50-WMA. That was a peak.
In 2018, AAPL’s stock was 18% above its 50-WMA. That was a peak.
In 2019, AAPL’s stock was 26% above its 50-WMA. That was a peak.
Today, AAPL’s stock is 28% above its 50-WMA.
This is a bubble, plain and simple.
Of course, AAPL stock can continue higher, becoming even more stretched above its 50-WMA but that mean reversion move is coming eventually.
Put simply, the risk to reward for large Tech Stocks is extremely high right now. Yes, you could possibly make money buying AAPL’s stock but the idea you’ll make a lot is minimal.
And at some point, this bubble will burst as all bubbles do and we will get that mean reversion move.
I believe this move may have started yesterday.
Smart investors are already taking steps to profit from the next major downturn in the markets.
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We made 100 copies available to the public.
As I write this, there are just 9 left.
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Chief Market Strategist
Phoenix Capital Research