2007 should go down as the tale of two markets. The credit bubble has burst, with banks (BKX) -17.9%, brokers (XBD) -14.5%, housing (HGX) -36.2%, and subprime lenders practically getting wiped out. Meanwhile, momentum investing is on fire, with technology (NDX) +21.2%, energy (XOI) +24.5%, emerging markets (EEM) +40.2%, and China (FXI) +69.9%.
Investor’s Business Daily is the bible of the mo-mo crowd. Its heat seeking index, the IBD 100, is +46.8% year-to-date. Component companies of the index break down as follows:
- basic materials: 14
- energy: 10
- industrials: 12
- technology: 28
- shipping: 2
- emerging markets (other sectors): 16
Fully 82 of the 100 stocks in the IBD 100 are plays on the global economic boom theme. And 25 are members of the “BRIC” countries (Brazil, Russia, India, China).
Such an abundance of winning bets and conviction on the part of speculators is classic of bubble tops. Combined with the death of the credit canary, in our opinion, the curtain is about to come down on Jim Cramer and his momentum apostles.