This Tech-Led Market is Looking Vulnerable; Here's How to Protect Your Portfolio

How's your portfolio doing this year?

For the first six months of 2018, the S&P 500 is up a modest 2.6%. Given the rocky start that stock market had this year, even that modest gain isn't so bad.

However, if your portfolio isn't heavily weighted with tech stocks, you probably made less. In fact, your portfolio may be in the red if you own a lot of financial stocks (banks, brokers, insurance companies). Same goes for industrial stocks and the usually reliable consumer staples stocks like General Mills, Clorox, Kraft Heinz and Procter & Gamble.

As the above chart shows, tech stocks have been leading the charge — providing the bulk of the gains for the overall stock market.

In fact, as my colleague Mike Larson discussed on Wednesday, the return for the S&P 500 would be negative if not for the contribution of the FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks.

However, one of the FAANGs took a painful tumble earlier this week. Netflix got clobbered for reporting a less-than-astronomical subscriber growth rate. It lost 13% of its value on the news.

That tumble should be a warning to tech-obsessed investors. Sure, Netflix shares had soared by more than 900% in the last five years. But the tech sector of the S&P 500 is valued at $3.4 trillion, which puts it on par with the entire GDP of Japan and Germany.

And get this: The FAANG darlings are selling for a nosebleed 53 times earnings.

In short, the stage for a tech stock stumble is set. That's especially true if the stock market follows its deeply entrenched 2018 monthly trading pattern of one-up-one-down, as the above chart shows.

Even the perpetually bullish International Monetary Fund thinks that stocks are overvalued and vulnerable. In a recent report, the IMF said:

"Financial markets seem broadly complacent in the face of these contingencies, with elevated valuations and compressed spreads in many countries.

"At the same time, however, high levels of public and private debt create widespread vulnerability.

"Asset prices are no doubt buoyed, not only by easy financial conditions, but by the generally still satisfactory global growth picture.

"They therefore are susceptible to sudden re-pricing if growth and expected corporate profits stall."

Sudden re-pricing? Whoa! That is simply a polite way to say "crash."

I don't expect the stock market to fall out of bed tomorrow morning. But the month of August could bring trouble. And I strongly suggest that you consider how painfully your portfolio would react to a 10%-plus correction ... or even a 20%-plus "sudden re-pricing."

My experience is that investors absolutely love volatile stocks when the market is going up. But they can't handle the financial pain of volatility when the stock market is falling.

If your portfolio is loaded with high-beta tech stocks, I strongly suggest that you consider lowering the beta (volatility) of your portfolio by jettisoning some of your beloved-but-high-risk tech stocks.

Best wishes,

Tony Sagami

P.S. A "sudden repricing" could present an incredible buying opportunity. And in a three-part video series, "Financial Judgement Day: Stunning Predictions for 2018-2022," Dr. Martin Weiss and Sean Brodrick outline four fortunes you can amass, simply by following their economic cycle research. They also name 14 investments destined to soar even as crisis hits the global markets. Don't wait. Watch their FREE videos here.

About the Technology Analyst

Even in the worst years for stocks, Tony was twice named “Portfolio Manager of the Year” by Thomson Financial. He was one of the first to introduce computer software for trading stocks. And in the early 2000s, he wrote “The Supernet,” providing a vision of the future internet that was far ahead of its time.

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