Everyone Laughed at Dow 36,000, And Then They Bought It

The first chart shows SPY/QQQ versus the 10-year yield. A clear general trend. The next charts are finance and tech ETFs versus SPY. The blue line is TLT/IEI for XLK, and IEI/TLT for XLF. When TLT outperforms IEI, it indicates rates are coming down, which benefits TLT more than IEI because it has greater duration. The reverse is true when rates go up, IEI goes down less than TLT for a given rise in interest rates. If rates have finished going down, the time to exit tech and enter value has arrived, but a major correction has also arrived or will be coming soon.

There remains a deflationary argument for bond yields dropping. We've been here before on rates, remember 2018? The market forced the Fed's hand back then. I mention this because at this juncture, I don't see tech outperforming from here. Whether oil and copper keep rising, or everything sells off, tech is going to get hit.

I've seen some chatter about the market overreacting to higher interest rates, but I don't see an overreaction. I think its an underreaction thus far in tech. Tt isn't an inflation or bond yield issue, but a stock market issue. As interest rates went down, increasing numbers of investors justified higher stock prices based on low interest rates. Once stocks are valued like bonds, they become as volatile as bonds once intrest rates change. Tech stocs are effectively a zero-coupon bond in this model because it has very low divdends and many companies have zero earnings. When rates increase, the tech sector should have, and does have, a highly volatile downward adjustement. The book Dow 36,000 is rightly pilloried for predicting Dow 36,000 in the years after 1999 (it was published 6 months before the market peaked), but the underlying thesis was that stocks are safer than bonds because they grow their earnings. Stocks should be valued like bonds (or even at a premium) and that gave a Dow 36,000 target based on interest rates back then.

For myself, I'm mostly drawn to the volatility index because I think it has support from both bearish and bullish moves (vertical rises in things like BTC).