Talking Numbers

Why Einhorn may be right about the tech bubble

Why Einhorn may be right about the tech bubble

Greenlight's David Einhorn is sounding the alarm on tech stocks to his investors.

The 45-year-old manager of the $10 billion fund wrote in an investment letter, "Now there is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it."

Well, Einhorn may be exaggerating about a consensus, let alone a clear one. But, he says there are reasons to go short high-flying tech stocks. "While we aren't predicting a complete repeat of the collapse," wrote Einhorn, "history illustrates that there is enough potential downside in these names to justify the risk of shorting them."

"Talking Numbers" contributor Richard Ross, global technical strategist at Auerbach Grayson, says the technicals back up Einhorn's fundamental take on tech stocks, particularly the tech-heavy PowerShares QQQ Trust ETF, which tracks the Nasdaq composite index.

(Read: Einhorned: SunEdison, Conn's jump on Greenlight stake)

Ross sees a "megaphone" or broadening top formation pattern that began in November. It is characterized by an upward sloping resistance line and a simultaneous downward sloping support line, resembling a megaphone.

"They call it the megaphone because, well, it looks like a megaphone," said Ross. "And, I'm shouting that you want to be a seller here."

Though the QQQ recently bounced back after nearly falling to its 200-day moving average, Ross says the bounce will fade. He predicts the QQQ will even break below the 200-day moving average, currently around $83 per share (The ETF traded just below $87 per share Wednesday afternoon). That's because Ross also sees the QQQ as trading in a long-term trend channel that began in 2010 with the 100-week moving average running alongside support at around $74 per share.

"I think we're going to test the 100-week moving average," said Ross. "I would be a seller into strength here in the Nasdaq."

(Read: Apple's stock split: Nice, but where's the product?)

Like Ross, Steve Cortes, founder of Veracruz TJM, also agrees with Einhorn's assessment of the tech sector. Echoing Einhorn's assertion that investors are rejecting conventional valuation methods for tech companies, Cortes said: "We've returned to some of the metrics we used to talk about way back in 2000, meaning we're talking about price-to-sales [valuations] all of a sudden rather than price-to-earnings. So, I think there's a lot of that frothiness, a lot of euphoria [similar to] the spring of 2000 present in the technology market right now."

Though there has been some rotation over the past couple of months out of the likes of Netflix and Facebook and into more established names like Microsoft and Intel, Cortes doesn't see it as proof of relative strength in some tech names.

"I think the high-flyers are going to serve as the warning shot and the anchor that will drag down all of tech," said Cortes. "Tech that has survived so far will not continue to do so and I think the whole space of technology within QQQ is very vulnerable."

To see the full discussion on the Nasdaq and the QQQ, with Ross on the technicals and Cortes on the fundamentals, watch the video above.

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