Tilson: Frothy Stock Market Could Still Be 'One To Two Years From The Top'

A growing number of investors and analysts are becoming concerned about the stock market’s steep valuations and the frothy trading in a number of tech stocks.

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Just because the market has a stretched valuation doesn’t mean it can’t go higher — and it doesn’t mean the rally is nearing an end.

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Economist John Maynard Keynes once said, “The market can stay irrational longer than you can stay solvent.”

On Tuesday, former hedge fund manager Whitney Tilson said the stock market is looking a lot like it did during the dot-com bubble of the late 1990s. Yet traders who sell or short the SPDR S&P 500 ETF Trust (NYSE: SPY) or the Invesco QQQ Trust Series 1 (NASDAQ: QQQ) now could still miss out on some huge gains.

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The state of the market is reminiscent of early 1999, Tilson said — a time when stock prices were getting extremely bloated.

Yet the Nasdaq still didn’t ultimately peak until March 2020. In the meantime, it more than doubled from its already overvalued level.

From Questionable To Crazy: Tilson said rational value investors are right to be getting uneasy about the trading action in the market, especially in frothy areas such as electric vehicle stocks, SPACs and IPOs. But during the peaks of market bubbles, questionable investor behavior tends to cross over into full-fledged insanity.

“In my experience as an investor for more than two decades, when I start to worry, we’re one to two years from the top,” Tilson said.

“And when I think things can’t possibly get any crazier, we’re still six months to a year from the top!”

At this point, Tilson said he is yet to see anything approaching the behavior he witnessed in the spring of 2000.

Benzinga’s Take: There’s certainly nothing wrong with starting to take profits in frothy stocks or looking to dial back exposure to the tech sector after its huge run.

But shorting the market at this point can be a dangerous game given that frenzied retail buyers have utter disregard for valuations, and they may be nowhere near the end of their buying spree.

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