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

Published date01 October 2020
Date01 October 2020
AuthorDamir Tokic
Robinhoods and the Nasdaq whale: The makings
of the 2020 big-tech bubble
Damir Tokic
International University of Monaco,
Monaco, Monaco
INSEEC Research Lab, Paris, France
Damir Tokic, International University of
Monaco, Le Stella, 14 Rue Hubert Clerissi,
98000 Monaco, Monaco.
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.
bubble, stock market, the big tech bubble of 2020
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.
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 trendin 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;31:914. © 2020 Wiley Periodicals LLC 9

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