[Good Morning Market] "US Stock Market Similar to Dotcom Bubble... Further Decline Inevitable"

Nasdaq rebounds 2.71%... Apple up 4%, Tesla up 11%
Rebound buying mainly in heavily declined stocks

Opinions emerge comparing US market to dot-com bubble boom
Companies with market caps over 10 times sales exceed dot-com bubble levels

Domestic market 'Four Witches Day' expected to have limited volatility

[Asia Economy Reporter Minji Lee] There are market opinions that the U.S. stock market resembles the boom phase of the dot-com bubble. Since the market has continued its upward trend without significant corrections since March, it is expected that an index correction of around 15-20% may occur in the future. Meanwhile, on the 9th (local time), the U.S. stock market rebounded as the instability in tech stocks subsided. The Dow Jones Industrial Average closed at 27,940.47, up 1.6% from the previous session, while the S&P 500 and the tech-heavy Nasdaq indices rose 2.01% and 2.71%, respectively. Apple and Tesla, which experienced sharp corrections the previous day, saw rebound buying, rising about 4% and 11%, respectively.

[Image source=Yonhap News]

◆ Namjung Moon, Researcher at Daishin Securities = The U.S. stock market, which has continued its upward trend without significant price corrections since the shock caused by the novel coronavirus (COVID-19) this year, is similar to the boom phase of the dot-com bubble. The dot-com bubble boom phase (October 19, 1999 ? March 10, 2000) was a period when signals of economic changes and beneficiary sectors brought by new industries were concentrated, during which the Nasdaq index rose 87.8% without breaking its trend line.

The dot-com bubble ended with a peak on March 10, 2000, and recorded a low point on April 14, 25 days later. The trigger for the index decline was the increase in companies with market capitalizations exceeding 10 times their sales amid a stock price surge far beyond earnings. Doubts about the sustainability of the tech stocks’ rise eventually led to an index correction. After this peak formation, the Nasdaq index fell by 34.2%, a retracement of about 39% of the 87.8% rise during the dot-com bubble boom phase.

During this year’s COVID-19 phase, the Nasdaq index has continued a rise of over 75% without significant corrections since forming a low in March, similar to the dot-com bubble period in 2000. The situation that triggered the decline during the dot-com bubble is also emerging. In fact, the number of companies with market capitalizations exceeding 10 times their sales is twice as many (62 companies) as during the dot-com bubble boom phase (33 companies).

As of October 2, when the Nasdaq index formed a peak, considering the dot-com bubble period’s decline (-34.2%), duration of the decline, and liquidity variables (M2 growth rate), it is judged that a 15-20% correction will occur before October 7.

◆ Kwanghyun Kim, Researcher at Yuanta Securities = Even at the moment a bubble bursts, market participants do not recognize it as a bubble. This is because the rise or fall is not due to a clear reason. From experience, money that flowed in like a high tide flows out like a low tide, and only after the decline has progressed to some extent do people look for the triggering event, which is usually trivial.

Looking at recent cases of Apple and Tesla, there were events such as stock splits, paid-in capital increases, and failure to be included in the S&P 500. These did not affect the companies’ earnings but greatly increased stock price volatility. If these stocks, which plunged sharply in one day, start rising again, it would be a simple correction, but if the decline continues, it should be regarded as a bubble collapse. This is why trivial events should not be overlooked.

◆ Sangyoung Seo, Researcher at Kiwoom Securities = The U.S. stock market’s rise was driven more by a technical rebound than by new issues. Large tech stocks, led by the semiconductor sector and Tesla, which had been declining, showed strength. It is expected that the Korean stock market will also see rebound buying in previously declining sectors. The weakening of the U.S. dollar and Japanese yen, along with rising international oil prices, has increased risk asset preference, which is favorable for the Korean stock market.

The KOSPI, facing the so-called ‘quadruple witching day’ when futures and options for both the index and individual stocks expire, is not expected to show significant volatility. On futures and options expiration days, foreign investors’ movements are important, and this means the possibility of large-scale selling by foreigners and institutions is low. Although trade frictions between the U.S. and China continue, the market shows a high preference for risk assets. Additionally, the basis?the price difference between futures and spot?has recently recorded a negative value, indicating that inventory liquidation has already taken place, so the possibility of further large-scale liquidation is low. However, since there is a lack of supply-demand players who can drive the index rise within the market, caution is needed regarding the ‘wag the dog’ phenomenon, where the futures market moves the spot market, driven by foreign investors’ futures trading.

This content was produced with the assistance of AI translation services.