Hello reader, welcome to the latest issue of HX Weekly!

This week, we bring you a powerful trio of notes that connect historical market lessons with the urgent realities of the current bull market.

Together, they explore one of the most critical dynamics playing out right now: the extreme dominance of momentum and technology stocks, and what typically happens when that leadership eventually shifts.

These pieces are especially timely. With valuations in technology at levels not seen since the early 2000s and momentum leadership reaching rare extremes, understanding these patterns can help you position your portfolio for both defense and offense.

At HX, our mission remains unchanged: to equip everyday investors and traders with the historical context, behavioral insights, and tactical awareness needed to make better decisions and build lasting wealth — regardless of market regime.

We encourage you to read these notes in full and reflect on how the themes apply to your own holdings.

As always, we welcome your thoughts, questions, and experiences from the 2000 era or today’s momentum environment!

Momentum Tops

Does The End Of Momentum Mean The End Of The BULL?

This may surprise many of you, but I often find myself reflecting on the advantages of being a financial newsletter writer versus my previous job running a hedge fund.

There are the obvious positives, like quality of life and less stress.

There might also be some obvious negatives, like less compensation. Although, if you do this job right, you can do pretty well!

One of the surprising advantages, though, is being open to a lot more sources of information.

Working on Wall Street, we were primarily focused on an ecosystem involving what is called “institutional” research. This includes the major brokerage firms and many other very smart and reputable firms.

I still very much use the research from those firms, but in doing this for the last six years I have found many other sources. Many of those sources are free and available to our readers.

One of those great resources is the folks at Carson Investment Research.

They run a money management firm, but they also publish some great free research.

You will likely recognize the name of their Chief Market Strategist, Ryan Detrick, as we have often quoted him in this publication.

Recently, I have also become acquainted with one of his colleagues, Sonu Vaherese.

He recently published an article with the clever name, “How I Learned to Stop Worrying and Love the Bubble”.

For those of you who know, this is a play on Stanley Kubrick’s classic 1964 war comedy Dr. Strangelove.

The article makes some excellent points about how the current BULL market could continue, and we encourage you to read it (linked above).

We will let you read the article and won’t review it here, but one part of it really resonated with us. It brought back some of our most unique memories from thirty years ago.

We say “unique” because when folks ask us what the CRAZIEST thing is we have seen in our three decades in the stock market, it was not what they expect.

It wasn’t September 11, 2001. It wasn’t the Global Financial Crisis. It wasn’t COVID.

It was the MELT UP that happened between October 1999 and March 2000. Nothing else is even remotely close!

In his note, Sonu shared a few indicators that have not been seen since that period.

He talks about the definition of a “bubble,” and one of the defining characteristics is extreme outperformance of “momentum” stocks.

Let me take a second and explain both those terms.

To me a “bubble” is defined as extreme and UNSUSTAINABLE movement higher in stock prices.

Over time, stock prices move higher with earnings. Over a long time, earnings grow a lot and stocks go much higher. They may pull back but this growth in earnings and shares is sustainable.

In a “bubble” we essentially borrow performance from the future.

Earnings may be going higher but share prices are going higher much faster.

Eventually, the earnings may catch up with these prices, but in a real “bubble” there is an inevitable bursting. This is where the share prices retrace this borrowed performance and can head much lower.

If you have a time frame long enough for earnings to catch up with share prices, perhaps you don’t mind losing money in the short term.

The reality, though, is that this could be a very long time. For the NASDAQ, after the Internet bubble, it was more than a decade.

The better course is to figure out when we are in a bubble, and how to trade it. This absolutely can be done.

My definition of “momentum” stocks is similar – it is stocks that go up a lot, quickly.

Often, they go up because earnings are also going up very quickly, but often that doesn’t matter. Many speculative stocks with no current earnings (or future) can become momentum stocks.

What drives these stocks higher is simply that there are cohorts of investors who buy them because they are going up.

Like a “bubble,” this makes them very profitable if you trade and time them right. It also makes them disastrous if you get them wrong.

(Later in this issue, we share one of our previous notes about momentum stocks.)

Sonu points out that we have seen tremendous outperformance of momentum stocks versus the broader stock averages.

Through the end of June, the S&P 500 Momentum Index was up by almost +30% while the S&P 500 was up around +10%. This is being driven by the stocks involved in building out the AI infrastructure, like semiconductors.

Looking at it over the last year, and three years, the outperformance of the Momentum Index has been historic.

Here is a chart that Sonu shared…

The one-year outperformance ranks in the 94th percentile and the three-year outperformance ranks in the 99th percentile. This means this has rarely (if ever) happened.

In fact, the last time we saw this kind of outperformance by momentum stocks was during that crazy period I talked about above (the MELT UP that happened between October 1999 and March 2000).

Along with this outperformance, we are seeing record levels in terms of the monthly dispersion among stocks.

The “dispersion” refers to the difference in performance among individual stocks. When many stocks are rising sharply while others are falling sharply, dispersion reaches very high levels.

Here is a chart Sonu shared showing the monthly return dispersion within a broad index called the MSCI ACWI Index…

The MSCI ACWI Index (All Country World Index) is a flagship global equity benchmark maintained by MSCI. It tracks the performance of nearly 2,500 large and mid-cap stocks across 23 developed and 24 emerging market countries, covering roughly 85% of the global investable equity market.

It is one of the broadest measures of the global stock market.

On the chart, you can see that the monthly dispersion has also reached levels we have seldom seen.

The last time we saw them at these levels was at the market tops back in both 2000 and 2007.

What this indicates is that investors are SELLING stocks to BUY other stocks.

Based on the momentum charts we shared earlier, we know they are buying those shares - just like they did in 2000.

Many institutional managers are being forced to “chase” performance in these areas, or risk underperforming.

This has led them to sell shares in software companies and technology growth stocks like Uber (UBER) and Shopify (SHOP), as well as, the Magnificent Seven.

While these are cautious signs, it doesn’t mean that everything ends badly. At least not quickly.

Here is a chart showing the LARGEST single monthly dispersion numbers in this index over the last thirty years…

On the chart, you can see that two of them were just a couple months ago, in April and May.

Another one was during a RECOVERY in the stock market back in April 2009.

More troublesome, though, are that the biggest two months were right near the end of the Internet Bubble. December 1999 and February 2000.

This is scary, but there is one aspect of the bursting of the bubble back in 2000 that folks forget…

While the technology stocks that had led the NASDAQ got crushed in 2000, the rest of the universe of stocks did quite well.

Here is another great table from Sonu….

It shows the massive outperformance of technology shares from 1998 to 2000 versus health care, financials and energy. Technology stocks were up over +260% during this period while most other sectors were up a little more than 20%.

Look at what happened, though, from the peak of the NASDAQ in March 2000 to December 2000.

Technology stocks got cut in half, but other sectors RALLIED.

The money rotated out of the momentum stocks into the growth stocks.

Do we think something like this could happen now?

Absolutely. In fact, we think it is what is most likely to happen.

Like every major technological evolution of the last two centuries, we are seeing temporary overinvestment. This also leads us to see stock returns pulling from the future into the present.

The "bill" for this must eventually be paid, and it will.

We just think that we have some great money-making opportunities in front of us before it comes due.

Now, we revisit one of the most instructive periods in modern market history.

This note serves as both a cautionary tale and a roadmap for what could unfold if today's tech concentration begins to unwind. (Originally published July 12, 2024)

Revisiting the Year 2000 Bull Market

The Forgotten Value Rally

This week at HX Daily, we are revisiting some stock market environments from years past.

Earlier this week, we reviewed 1995. That year's performance is similar to that of 2024.

Stock market investors hope it ends up with the same finish as that was one of the best years ever for the stock market.

After thinking about 1995, we also considered what would happen in the next few years.

While 1995 was the best performance for the S&P 500 since 1958, the stock market would continue to rip through the end of 2000. It was one of the best periods ever. Here is that chart…

From January 1995 to December 1999, the S&P 500 experienced an incredible +220% or 26% compound annual return. This is double the long-term average return of the S&P 500 over the last hundred years.

One recent topic of conversation has been the relatively high valuations of technology stocks. In fact, they are the highest they have been since the early 2000s.

Many people have talked about this being a "bubble" in technology stocks and see it as a cautionary tale.

We will not argue that technology stocks are not at relatively high valuations. These may even be “bubble” levels.

We note, however, that they can go MUCH higher.

Here is a great chart from one of our investment research firms – Bespoke Investment Group.

This shows the multiple for technology stocks and how the current valuation returns to levels from the early 2000s…

The chart also shows that they can go much higher. During the 1999 Internet 1.0 technology stock bubble, valuations more than doubled from current levels.

That also happened with the expansion in earnings from technology stocks recently. Many of the technology stocks of that era had little or no earnings and were certainly not growing like what we have seen from NVIDIA Corporation (NASDAQ: NVDA).

This is an interesting observation from that period, but we had another one that we wanted to share, as many folks have forgotten about it.

Although technology stocks began to trade off in early 2000, the overall stock market held pretty well.

As technology stocks saw their multiples expand and massive rallies, the rest of the stock market performed poorly.

The spread between the performance of growth and value stocks was the highest it had ever been. Many value-focused portfolio managers (and short sellers) gave up.

There was also a big performance differential between the market capitalization-weighted S&P 500 and the equal-weighted version. Does any of this sound familiar?

Here is another great chart from Bespoke.

It shows the performance differential of the market cap-weighted version of the S&P 500 versus the equal-weighted version from 1999 to 2001.

We remember this period very vividly. Many portfolio managers who posted terrible relative performance in 1999 posted some of their BEST years in 2000.

This was because the high-valuation technology and most speculative stocks crumbled, and the cheaper stocks began to rally.

In the same way that investors had fled the rest of the market to avoid missing out on technology stocks, they now rotated out of them and into the rest of the stock market.

For the full year 2000, the market-cap-weighted S&P 500 was -9.1%, but the equal-weighted version was up more than +8%. The NASDAQ Composite was down more than -39%!

We want that to sink in—the median stock price performance of the S&P 500 was up almost double digits, while stocks on the NASDAQ were cut almost in half.

If we DO experience a true technology stock market bubble, this type of outcome is well off most investors' radar screens.

We are not saying it is likely to happen – either the technology stock bubble or the recovery in the rest of the stock market – but there is precedent.

Few will also remember that it was also really the terrible events of September 11 that plummetted us into a broader economic recession and total stock market Bear Market.

There is historical proof that the stock market can continue to work even if technology stocks deflated.

History can show us the way!

Next we show how momentum is a powerful force that has created enormous wealth in 2024–2026 — but it comes with its own unforgiving rules.

Using NVIDIA as a prime example, we explain the psychology behind why overextended momentum names rarely correct through quiet consolidation. (Originally published March 18, 2024)

Why Momentum Stocks Don’t Go Sideways

Respect the Physics of Momentum Stocks

For the last few weeks—and especially this week—we have urged caution about the near-term outlook for stocks. 

We don't have a crystal ball that tells us what will happen next, but we do have three decades of active experience in the markets and have seen many patterns before.   

We are now seeing very strong patterns that tell us a break in momentum IS coming relatively soon… 

At the end of February, we republished a note we had published several years ago discussing the psychology of “momentum” stocks. You can read that note here. 

We published it because we were beginning to see the return of the "stonks," crazy price action in momentum stocks that were pulling in more investors. 

This activity has only increased in the two weeks since we published that note. 

On that note, we explained the physics of momentum investing and why it works. 

Today, we want to emphasize a point that was from that note — momentum stocks do NOT correct by going sideways. 

What do we mean? 

Let’s revisit our favorite chart – the chart of stock market leader NVIDIA Corporation (NASDAQ: NVDA). 

We have recently been using price-only charts, but this one has a few other useful pieces of data, including the volume and the "relative strength index" (RSI). (You can read about this indicator here.) 

You can see in the chart that NVDA has had a HUGE run! We all know this, and (hopefully) many of you have taken advantage of some of it… 

In the last week, though, the stock has begun to taper off.   

It is not down much, but the high was seven trading days ago. That was on March 8, also a day when the stock showed a huge intra-day reversal. That means that it closed much lower than where it opened. 

Here is the intraday chart for NVDA from March 8… 

The stock had closed the previous day at $926. It opened at $947, traded through $970, but then quickly retreated and headed down -10% or almost—$100 to $875. 

Historically, this kind of reversal can signify a change in the trend. 

Also, the fact that it has now been lower for more than a week can signal a likelihood of a reversal and a move lower. 

If the previous statement is true—that momentum stocks don't correct by going sideways—then NVDA is likely headed lower. 

How do we support our statement? 

Well, factually, it is correct. If you look at stocks with a combination of upward momentum indicators (RSI above 90, high standard deviation distance from moving averages, etc.) and look at the next month – they almost NEVER go sideways. 

That is data we will share in a future note… 

Right now, though, we want to talk about the psychology of why they don’t go sideways. 

We have previously talked about understanding the "cohorts" of stock ownership.   

This is looking at who owns the stock at what price. The moving averages can tell us a lot about the cohorts. This is knowable data. 

What is unknowable is the motivations of those particular cohorts at any given moment. 

What we can tell you, though, is that we are 100% confident that in almost every situation where we see the kind of momentum we have seen in NVDA (and a host of other stocks recently), you are seeing buyers who are buying because they expect it to go up more. Soon. 

These buyers look at how much it has increased in the past day, week, month, or quarter and say, "Wow!"   

On March 1, you could have bought NVDA for $800 a share. It was +19% in the previous seven trading days, +30% during the last month, and +62% year-to-date! 

Furthermore, it proceeded to go higher! At the high on March 8 (just six trading days later), you were sitting on a (momentary) gain of +21%!   Even now, you are sitting on a +10% gain. 

The people who bought starting on March 6 (nine trading days ago) are flat or underwater. That was NOT their expectation. As more days go on of sideways movement, they will lose their motivation for buying. 

Remember, many were not buying NVDA because of the long-term prospects but because they expected it to go up soon. 

How do we know this?   

We know this because when you see a market correction in an overbought stock, it doesn't correct sideways. 

These investors lose their motivation to own and then move on to selling the shares. This removes the motivation of new incremental momentum buyers (it is no longer going up), and even more investors get "bored." 

Now, as the shares drift lower, you see more investors underwater. NOW, they begin to panic. 

They either want to keep their gains or don't book losses, as many bought higher. 

Elements of this psychology happen in ANY stock but are magnified in momentum stocks a hundred times! 

Momentum situations can yield a lot of money. They can go much higher than anyone could ever expect.   

The key, though, is making sure you KEEP those profits. Respect the physics of momentum stocks and take some profits! 

We hope that you’ve enjoyed this week’s issue of HX Weekly…

Do you have any thoughts, questions, or feedback? Tell us more in the comment section or at [email protected].