Robinhoods and the Nasdaq whale: The makings of the 2020 big‐tech bubble

• Published date: 01 October 2020
• Date: 01 October 2020
• DOI: http://doi.org/10.1002/jcaf.22473
• Author: Damir Tokic

OTHER

Robinhoods and the Nasdaq whale: The makings

of the 2020 big-tech bubble

Damir Tokic

1,2

1

International University of Monaco,

Monaco, Monaco

2

INSEEC Research Lab, Paris, France

Correspondence

Damir Tokic, International University of

Monaco, Le Stella, 14 Rue Hubert Clerissi,

98000 Monaco, Monaco.

Email: dtokic@monaco.edu

Abstract

This article discusses the big-tech bubble of 2020, which has all characteristics

of the positive-feedback trading model bubble. The rational speculation activ-

ity successfully attracted the positive feedback traders (or the retail army of

novice investors), which overpowered the rational arbitrageurs (fundamentally

driven hedge funds and market makers) and inflated the stock price valuations

well beyond the fundamentals.

KEYWORDS

bubble, stock market, the big tech bubble of 2020

1|INTRODUCTION

Large U.S. technology stocks reached irrationally high

valuations in 2020, which many branded as the big-tech

bubble. Historically, the average PE ratio for S&P 500 is

around 15. In August 2020, the PE for S&P 500 reached

above 35, which is comparable only to the peaks of prior

bubbles. Big tech firms were particularly overvalued,

which significantly skewed the broad market valuations

given the heavy influence of the big tech firms in the

S&P 500. Apple, for example, reached the valuation of

over $2 billion and accounted for over 6% of S&P

500 index, while Apple, Microsoft, and Amazon together

accounted for over 17% of the S&P 500, with Amazon

trading at the PE ratio of almost 130. Tesla market capi-

talization was higher than the value of the entire auto

sector, with the PE ratio well over 1,000. Exhibit 1 illus-

trates the long-term stock prices of Apple and Tesla, with

the exponential rise and melt-up in September of 2020.

Interestingly, both Apple and Tesla announced stock

splits in summer of 2020, which should have no influence

on fundamentals, and yet the stock price of both compa-

nies sharply increased following the announcement,

which lead to the melt-up in these two stocks and the

broad stock market index. This article discusses the big-

tech bubble of 2020 using the positive-feedback trading

model as the framework.

2|THE ANATOMY OF A BUBBLE

AND THE POSITIVE-FEEDBACK

TRADING MODEL

Long, Shleifer, Summers, and Waldmann (1990) develop

the positive feedback model to explain how bubbles

develop in lab setting based on the interaction of market

players with different trading strategies. These are the

key market participants: (a) positive feedback traders,

(b) rational speculators, (c) rational arbitrageurs, and

(d) passive investors.

Positive feedback traders trade solely based on techni-

cal analysis and buy as prices rise expecting the trend

continuation. Rational speculators understand and

exploit the trading strategy of the positive feedback

traders by creating artificial price patters and uptrends,

which attracts the positive feedback traders. Specifically,

the rational speculators buy early and artificially price

create patterns, such as breakouts, and channel supports,

which catches the attention of the positive feedback

traders who start to “follow the trend”in anticipation of

“the trend continuation.”The rational speculators even-

tually sell for profit as prices rise. In this game, clearly,

the rational speculators are “predators,”while the posi-

tive feedback traders are “prey.”

Rational arbitrageurs in theory restore the market

efficiency (Fama, 1965) by selling overvalued assets and

Received: 15 September 2020 Accepted: 16 September 2020

DOI: 10.1002/jcaf.22473

J Corp Acct Fin. 2020;31:9–14. wileyonlinelibrary.com/journal/jcaf © 2020 Wiley Periodicals LLC 9