Are we in the middle of a Tech Wreck? And if we are, where or when will it end?
As of the open on March 13th, Nasdaq 100 had lost -9.78% over the last month and -6.74% year to date.
And less than 11.0% of the Nasdaq constituents were trading above their respective 20 Day Moving Averages, something that would have been unthinkable in the aftermath of the US election. When the indicator traded up in the mid 70s.
Source: Barchart.com
That said, sentiment around the Nasdaq 100 did have a wobble in the last week of 2024 and we touched the current level on two occasions in December.
Source: Barchart.com
What are we experiencing this dislocation?
We identified the reason why the market has taken a downward leg in recent weeks in the article Navigating Market Uncertainty: A Roadmap for Traders in Volatile Times, in case you haven’t read this, you can think of the sell-off as the Trump Dump.
Some sectors and stocks have been harder hit than others, of course.
The most popular post-election stocks have been the hardest hit
Source: Bespoke Investment
Healthcare Technology and Energy stocks have been hit the most
Source: Bespoke Investment
So what is it about Technology?
Health care is feeling the pain because of the potential for large cuts to US Government spending on health.
Energy names have been hit by Donald Trump's promise to “Drill, Drill, Drill Baby”, increasing supply whilst fears about a US recession call the level of energy demand into question going forward.
And as this next chart from Bank of America shows, the Technology sector in the US has a lot to lose.
The sector has a high level of sales to many of the regions that Donald Trump is likely to impose permanent tariffs on. And, as we have seen Canada, the EU, and China have all responded in kind to President Trump’s tariffs. None of which is helpful as far as global trade, and the stock prices of export-led companies are concerned.
Source: BofA Research
That’s being reflected in the performance and valuation of the Magnificent Seven stocks when compared to the other 493 S&P 500 members.
Source: Goldman Sachs Research
The forward PE (Price Earnings) ratio for the Magnificent Seven has fallen sharply in both absolute and relative terms.
With the premium that the mega-cap technology stocks enjoy over the rest of the index falling by around a third.
In other words, traders and investors are no longer prepared to pay (as much of) a premium to own these stocks and in the absence of buyers their stock prices and PEs will fall until we find a new point of equilibrium that tempts buyers back to the table and deters sellers.
There are some signs of encouragement
Not everything is negative, the percentage of Nasdaq 100 stocks that are trading above their 50 D Moving Average has retraced to an area of trend support - and we have seen the indicator bounce from these kinds of levels on four occasions, since August 2022.
Source: Barchart.com
Though I would like to see the indicator finish the week above the blue uptrend line, before we could have any thoughts about a bottom being in place.
This is quite a contrast to the situation just over a month ago that I highlighted in this LinkedIn post.
Source: Darren Sinden/LinkedIn
The MA% indicator was a good guide on the way down, hopefully it will be again on the way up.
Lies damned lies and statistics
Statistical data about the medium to longer term performance of the Nasdaq 100/Technology stocks after a correction is encouraging - US research house Bespoke Investment find that when the index is 3 standard deviations below its 50 Day Moving Average, it tends to outperform on the upside over 1,3,6 and 12 months, when compared to periods without the downside move.
Source: Bespoke Investment
In other words, the Nasdaq 100 index has historically bounced back in the face of sharp sell offs, reflecting the swing in trader sentiment from extreme greed to extreme fear and back again.
However, we can’t ignore this chart from Bank of America which draws a direct parallel between the current price action in the Nasdaq 100 index and US Treasury Bonds with that seen in 2000, 2002 and 2008, none of which were good for equities.
Source: BofA Research
However, the US bank also makes this observation in it widely followed Flow Show report:
“We say this is a correction, not a bear market in US stocks; “markets stop panicking when policy makers start panicking”.since (the) equity bear threatens recession, fresh declines in stock prices will provoke flip in trade & monetary policy back to “he loves me” stance; (and) correction history suggests (the) S&P 500 (is) a good buy at 5300”
It's almost impossible to predict when the sell off will end. And we certainly shouldn't try to pick a bottom, rather we should let the market and indicators on it inform our thinking and tell us when sentiment is ready, and able to turn once more.
Charts like this one from Trading Economics can be very instructive in this regard
In this instance, we see the daily and month-over-month percentage changes in major equity indices plotted against each other.
What is very noticeable is the divergence between the US and Chinese stock market indices as well as the outperformance between European indices and their US counterparts.
Source: Trading Economics
Which reminds us that there is almost always a trade to be found, or a market to trade even when US equities are selling off.
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