Greenlight Capital's David Einhorn just called the top in stocks, and gave 10 reasons why tech is in a bubble

• September 2 was the top in the stock market, hedge fund investor David Einhorn argued in Greenlight Capital's third quarter letter.
• According to Einhorn, the market is in the midst of a bubble driven by technology stocks, and that bubble "has already popped."
• "What matters in a bubble is market psychology, not valuation. Valuation is irrelevant; that's
  what makes it a bubble," Einhorn said.
• Here are 10 reasons why technology stocks are in a bubble, according to Einhorn.
• Visit the Business Insider homepage for more stories.

The top in the stock market is in, according to hedge fund investor David Einhorn.

In Greenlight Capital's third quarter letter, Einhorn offered 10 reasons technology stocks are in a bubble that "has already popped."

"Bubbles tend to topple under their own weight," Einhorn explained, adding that market psychology is what matters in a bubble, not valuation. "Valuation is irrelevant; that's what makes it a bubble," Einhorn said.

Einhorn admitted that his 2016 bubble call was wrong, and that this bubble call could be disproven. But he contended that investor sentiment is in the process of moving from greed to complacency, which is what happens just before it moves to worry and then panic.

Here are 10 reasons technology stocks are in a bubble, according to Einhorn.

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1. "An IPO Mania."

2020 has seen a surge in IPOs despite the COVID-19 pandemic, and "blank check" SPAC companies have been the preferred route for companies to go public. Just this week Jack Ma's Ant Financial Group said it planned to raise $35 billion in a record breaking IPO.

2. "Extraordinary valuations and new metrics for valuation."

Einhorn points to his recent favorite, price-sales growth divided by sales growth. "This ratio is the PEG ratio on steroids and amounts to nonsense," Einhorn said.

3. "A huge market concentration in a single sector and a few stocks."

The top five stocks in the S&P 500 currently make up 20% of the entire index, according to Ned Davis Research, while the technology sector represents more than 28% of the index.

4. "A second tier of stocks that most people haven't heard of at S&P 500 type market capitalizations."

Einhorn is likely referring to a slew of cloud and software stocks that have seen a meteoric rise amid the COVID-19 pandemic and now sport valuations of more than $20 billion. Some examples include ZScaler, Okta, and RingCentral.

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5. "The more fanciful and distant the narrative, it seems the better the stock performs."

Einhorn could be referring to story stocks that have a business plan but little to no revenue, yet still see a surge in valuation. One example is Nikola, which went public via a SPAC earlier this year and saw its market value surge ahead of Ford's despite it not expecting to sell cars and recognize revenue until late-2021. 

6. "Outperformance of companies suspected of fraud based on the consensus belief that there is no enforcement risk, without which crime pays."

Einhorn could be referring to GSX Techedu, which has been accused of fraud by short-sellers like Muddy Waters, yet has seen its market valuation surge on the belief that the Chinese-based company will not face consequences for the alleged fraud. 

7. "Outsized reaction to economically irrelevant stock splits."

Einhorn is likely referring to the August stock splits of Apple and Tesla. Both names experienced a surge in their share prices, and Tesla added more than $200 billion in market value in the two weeks after its stock-split announcement.

8. "Increased participation of retail investors, who appear focused on the best-performing names."

The COVID-19 pandemic has resulted in a surge in trading activity among retail investors as cancelled sports and stay-at-home orders drove a new generation to pass the time with the ups and downs of the stock market.

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9. "Incredible trading volumes in speculative instruments like weekly call options and worthless common stock."

Einhorn points to Hertz common stock as an example, noting that 1 billion shares traded in a single day earlier this month after the car-rental company said it had obtained DIP financing. "Historically, in a bankruptcy like this, the shares would be promptly delisted by the exchange to protect retail investors," Einhorn said.

10. "A parabolic ascent toward a top."

Stocks have surged to all-time highs amid the COVID-19 pandemic, driven by the technology sector in particular.

Einhorn isn't alone in his thinking. Ned Davis Research said in a note on Monday that the "Elite Eight" technology stocks look like a bubble after their historic ascent. According to NDR, these eight companies have seen their collective market capitalization surge to $8 trillion from $1 trillion in eight years.

Einhorn added a personal anecdote in terms of the "toppy behavior" he has seen in the markets: receiving a job application from a 13-year old with the e-mail subject line reading, "I am young, but good at investments."

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