Rank Speculation Returns: A Crisis of Concentration

A Review of 90 Days of Noise & Nonsense Among Speculative Investments

At the start of the year, KCR penned ARKK vs. QQQ in the Dot.Com Bust and Specious vs. Spurious Correlation. The point of both papers was to warn readers that after speculative peaks, stock prices drop swiftly but then rally violently. Post-bubble price patterns were impossible to predict but precise in their message: speculative counter-rallies among the “fallen generals” of speculative cycles were the rule, not the exception.

Today we provide a brief review of the short-term spikes in some of the stock market’s most speculative stocks.

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As interest rates have risen and taken banks, insurers, real estate, and many other stocks essential to the real economy lower, talk of a major financial crisis or great depression has run riot. As the investing public grapples with the daunting fiscal math of US macro, the asset prices of many Covid darlings have gapped higher.

The Speculation Boom in Bytes, Baubles & other Discretionary Goods Returns

The chart below shows the 90-day performance of the following six groups of stocks, from left to right:

1. The largest 100 stocks in the Nasdaq that outperformed the index rose 31.6% in the last 90 days
2. The 100 largest stocks in the Nasdaq were up 16.5% over the last 90 days
3. The Russell 1000 growth index rose 10.3% over the last 90 days
4. The Nasdaq 100’s largest stocks that underperformed the index rose only 4.3% in the last 90 days
5. The S&P 500 rose 3.7% over the last 90 days
6. The Russell 1000 value index fell -2.8% over the last 90 days

We broke out the returns of the stocks within the largest 100 Nasdaq names that beat (first column, “Nasdaq winners”) and lost (fourth column, “Nasdaq losers”) vs. QQQs for a very specific reason.

The chart below shows the 3-month rolling batting average for the 100 largest firms in the Nasdaq. Said differently, the chart shows what percentage of the 100 largest stocks in the Nasdaq actually beat the value-weighted returns of largest 100 stocks in the Nasdaq. In such a concentrated index, with only 100 stocks, one could reasonably expect batting averages at the single-stock level to be fairly contained.

And that is precisely what we see. The dashed red line shows that over history, roughly 55% of the stocks in the Nasdaq 100 perform equal to or better than the 100 largest Nasdaq stocks (QQQs). Yet in the last 90 days, only 28% of the stocks in the index managed to outperform the broader benchmark’s 16.5% return.