A parallel of the 2000 & 2020 markets
We've all heard the quote "history tends to repeat itself". Well I am seeing an interesting parallel of the Dow to Nasdaq ratio of early 2000 and now. That is, right before the market tanked late summer 2000, the Dow had around a 2.3 to 1 ratio to the Nasdaq, which historically is super low. Now unless valuations in the Nasdaq have vastly changed in relation to valuations in the Dow over the last 20 years, I find it intriguing that the ratio right now is 2.39 to 1.
My theory is, whenever the Dow to Nasdaq ratio gets close to 2 to 1 ratio, it means either the Dow is way too low, or the Nasdaq way too high. Thing is, we know that PEs in the Dow are around 20 or even greater going forward right now. Historically that would make the Dow overpriced, as around 16-17 is historic. Well if that's the case, then the Nasdaq is surely super over valued. So at this point, it's my opinion that we are very close to a major correction, and as the ratio trends lower, the correction closer. Of course history doesn't have to repeat itself exactly, but it sure looks very plausible to me.
Now looking back at mid 2000 to Sept 2001, the Nasdaq fell 65%+ from it's highs, while the Dow fell only 18%. So it's my contention that shorts of either the most over priced nasdaq stocks is in order, or just shorting the Nasdaq, or the sectors that are the most overpriced within it. In this case the most overpriced sectors are the cloud based software stocks, electric vehicle stocks, and the semi conductor stocks. I for now am using the SOXS. However I might change or add to shorting the Nasdaq as a whole(which is more conservative).
