Now that the NASDAQ is close to its historic high point of 5,000, it is easy to get paranoid. It is easy to think that history will repeat itself and the NASDAQ will suffer a very terrifying plunge shortly. You would be justified in thinking this. After all, the last time the NASDAQ crossed the 5,000 mark, it plunged dramatically shortly after. A lot of investors lost their shirt. The NASDAQ signalled the end of the first Dot Com boom.
We are in the middle of the second or third Dot Com boom and the good news is that NASDAQ is more diversified now than before. Previously, the main drivers of the NASDAQ’s mad rush to the 5,000 point were primarily internet companies. Now, thanks to biotechnology, software, internet, and other types of companies, the NASDAQ rally seems to be a bit more diversified.
Moreover, there are several key indicators that would point to a further run for the NASDAQ. Maybe instead of heading for the exits immediately after the NASDAQ hits 5,000, you might want to stick around. Keep your eyes on the following factors.
Unlike in the year 2000, where the cyclically-adjusted PE ratio was at 43.8, this factor is at 27.8 currently. This indicates that there is a lot more room to run for the NASDAQ before any correction. Another factor to keep in mind is the price-to-sales ratio of NASDAQ stocks. In the first Dot Com bust, this ratio was at a whopping 2.1. Right now, we are at 1.8. Another important factor is the price-to-book ratio. During the first crash, this ratio was at 4.8. Now, we are at 2.8.
All told, these indicators point to the fact that today’s NASDAQ is quite different from the NASDAQ of 15 years ago and still has a lot of life left in it. With that said, you need to hedge your bets. You need to make sure you know where the exits are and you have a clear exit strategy. Why? Things change very quickly and you don’t want to get left holding the bag.