Title: “”
Tags:
- Big Tech Stocks
- Technical Analysis
- Stock Market
- Double Top Pattern
- Market Concentration
- Selloff Risk
- Investment Concerns
- Equity Universe
An “extremely bearish” chart formation has raised concerns about the top 7 Big Tech stocks, including giants like Apple, Nvidia, and Tesla, facing an increased risk of a selloff.
The combined price chart of the “Magnificent 7” stocks is showing an ominous “double-top” pattern, prompting worries in the market. Octavio Costa, from Crescat Capital, expressed this concern in a LinkedIn post, stating, “For what it’s worth, the top 7 largest tech stocks are currently staring down from a scary double-top technical formation.”
This development has intensified apprehensions that Wall Street’s heavy reliance on a handful of Big Tech stocks may have reached unsustainable levels. In 2023, the U.S. stock market rally defied high-interest rates and recession predictions, led primarily by this select group of Big Tech names, collectively known as the Magnificent 7.
The Magnificent 7 includes Apple, Microsoft, Alphabet, Meta, Amazon, Nvidia, and Tesla, and at its peak, these stocks accounted for as much as 30% of the S&P 500 index’s total market capitalization. This raised concerns that investment flows were becoming overly concentrated within a limited segment of the equity market.
The concentration in a small cluster of stocks presents both opportunities and challenges. The main challenge is that due to the size of these top stocks, investors in the S&P 500 Index are now disproportionately exposed to the future prospects of these companies. Christopher Peel, a portfolio manager and research analyst at Franklin Templeton, highlighted this concern in a recent note.
Adding to these concerns is the emergence of an ominous chart pattern, the “double top,” which is now visible on the chart that tracks the combined prices of the Magnificent 7 stocks. In technical analysis, a “double top” is widely considered a sign of an imminent bearish trend reversal. It signifies a medium or long-term change in the asset class’s trend following two consecutive price highs with a moderate decline in between.
Octavio Costa expressed his concerns regarding this pattern, stating, “Either interest rates must decline drastically from current levels or the valuations among these stocks are primed for a meaningful reappraisal.”
The collective share prices of the seven most valued U.S. stocks have surged by 82% this year, far outpacing the 10% advance of the benchmark S&P 500 index. The momentum in Big Tech stocks was driven by the growing excitement around artificial intelligence technologies, particularly following the successful launch of OpenAI’s language model, ChatGPT.
At the peak of this year’s equity rally, the combined market capitalization of these seven stocks exceeded $11 trillion, nearly triple the GDP of Germany. This level of reliance on these stocks has been described as “historically unhealthy” by some analysts.
While some remain bearish on U.S. tech stocks, others anticipate a double-digit end-of-year rally, fueled by strong third-quarter earnings and the rapid rise of artificial intelligence technologies. Dan Ives, managing director at Wedbush Securities, holds a more optimistic view, expecting this sector to post robust earnings in the coming months.
In summary, the bearish chart formation in the Magnificent 7 stocks has raised concerns about a potential selloff, highlighting the challenges posed by the concentration of investment in a handful of Big Tech companies and the need for a potential market reappraisal.
