To The Moon

It’s different this time…

That’s what they say.

And to be fair, they kind of have a point.

The tech boom we are living through right now is extremely different from the dot com bubble on many counts.

And yet —it seems for every difference there is a similarity, for every justification and cause for optimism there are rising risks and cause for concern.

This week’s chart is a perfect illustration… It shows the path of US Semiconductors’ market cap weighting (which has just reached a new all-time high).

Here’s some perspectives on this chart and possible next steps.

Glass Half-Full: sectors rise and fall over time and new sectors get big and stay bigger for longer as their economic significance rises (e.g. General Motors was the biggest stock for decades during mass adoption of automobiles, the energy sector went from about 3% market cap weight in 1912 to 18% in 1921 and ranged around 10-20% up until the 90’s... even the tech sector went from 6% in the early-90’s to an average of 15% in the decade following the dot-com bust, and there are many more examples of sectors once grand becoming a shadow of their former selves).

In other words, if semiconductors really are that economically significant in the AI-age, then it’s actually good, fine, and normal to see the rise and rise of semis.

Glass Half-Empty: it’s all gone too far too fast. I think you can even have a tactically glass half-empty view that says it’s overhyped in the short-term, but will remain a significant and important sector going forward. Even with that example before of the energy sector, there were many booms and busts along the way, and there are so many examples of sector/industry market cap weightings surging to highs and extremes like we see in the chart below, only to come crashing back down (even if to a new higher plateau relative to before the hype cycle began).

The Cycles Perspective: taking the pragmatism or realism a little further, there are 3 cycles we need to think about here — the Stockmarket Cycle (and we are looking well-progressed in the cycle on that front), the Hype Cycle (with regards to new tech adoption; arguably that’s well progressed in the hype stage), and the Bubble Cycle.

On that note, with the latest move higher it’s anyone’s guess as to how far it goes… this is the melt-up stage of the bubble cycle and it’s dangerous on 2 counts: dangerous to bet against it as it can go further and faster than you think, and dangerous when it turns as it can do so without warning —and drop just as fast: see the 2000 peak-and-pop below.

So there you go, it might go up, it might stay up, and it might come crashing down — that’s the thing, we can look for warning signs, we can prepare, we can draw up contingencies, diversify, use portfolio protection, and even let some of the upside run and lean into it… but at the end of the day, it is a guessing game as to how things will precisely run their course when we get to this stage of the big 3 cycles.

Having visibility on the state of things and a clear perspective on the possibilities is key to navigating this exciting and harrowing stage of the cycle. $VanEck Semiconductor ETF(SMH)$

Key point:  We’re in dangerous market territory for bulls and bears alike.

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