The Real Story Within the Nasdaq

Advertisement

Tech stages a rebound … the shocking condition of the average Nasdaq stock … the silver lining if you’re already down big in your tech holdings

 

The fastest pace of inflation since 1982.

This morning, we learned the consumer price index rose 7% in December. Year-over-year, that’s the fastest reading in 40 years.

However, it didn’t exceed forecasts, so stocks are taking it in stride as I write Wednesday early-afternoon. The three major indices were up-and-down in the morning session, but are climbing as I write.

The good news is that this means the Nasdaq is holding its gains from over the last two days.

On Monday, the Nasdaq dropped 2.7% in the morning. But in the afternoon session, buyers charged in, leading to a complete reversal of those losses. It ended the day slightly up, breaking a four-day losing streak.

Yesterday, we saw a similar reversal. The Nasdaq was down 0.6% shortly after the bell before surging. It ended the day up 1.4%.

Let’s jump to legendary investor, Louis Navellier, for more. From yesterday’s Accelerated Profits Flash Alert:

The last hour surge in the Nasdaq (on Monday) was incredibly impressive.

Volume was high, which is a sign of a lot of smart money coming in to rescue the market.

Obviously, the Nasdaq retested recent lows, and everybody thought it was a good time to buy.

However, an important thing to watch here is these “lows.”

Louis points out that the first big low came back on December 3rd. We saw another on the 20th. The third came on Monday, January 10th.

Here’s how this looks:

Chart showing a succession of lower lows in the Nasdaq
Source: StockCharts.com

Back to Louis on the significance:

If you draw a line, these retests are at slightly lower lows. So, a technician would say “oh look, the Nasdaq is going to be trending lower. Look at the low points.

Yes, investors need to watch this closely. But more important than that, investors need to be watching the specific tech stocks in their portfolio.

That’s because there’s a disconnect between what’s going on in the broad Nasdaq, versus what’s going on in the average tech stock.

***How a market cap weighted index is glossing over significant losses within the Nasdaq

As I write, the Nasdaq is only 5.6% below its all-time-high, set back in late November.

However, if you’re feeling that the tech component of your portfolio is down far more than 5.6%, there’s a reason for that – it’s probably true.

There’s a major disconnect between the broad Nasdaq Index and the average stock within the Nasdaq. We’ve explained this dynamic many times before here in the Digest. It’s due to how the Nasdaq is structured as a market-cap weighted index.

In short, this means that bigger stocks with greater market capitalizations (think Apple, Microsoft, and Amazon) receive a greater weighting within the overall index. The result is that how these mega-cap stocks perform has far greater impact on the level of the Nasdaq than the average Nasdaq stock with a much smaller market-cap.

But the scope of this difference is staggering. It also accounts for why your tech stocks might be down far more than 5.6%.

From Yahoo! Finance:

Underneath the surface, the tech stock heavy Nasdaq Composite is being shredded as traders fret about higher interest rates from the Federal Reserve this year.

Nearly 40% of the stocks on the exchange have been cut in half, according to new research from Sundial Capital Research’s Jason Goepfert.

The research firm notes this kind of trading action on the Nasdaq hasn’t been seen since at least 1999.

Check out the chart below from Goepfert. It looks at how many stocks within the Nasdaq are already in a bear market. Technically, that means “down 20%” from recent highs.

If you can’t see the chart’s headline, the answer is astonishing…

Nearly two-thirds of all Nasdaq stocks are currently in a bear market today. And remember, that’s with the Nasdaq off only 5.6% from its high.

Chart showing that nearly 2/3rds of Nasdaq stocks are already in a bear market
Source: Sentimentrader

***There’s good news and bad news in this

The bad news is largely self-evident – you might be holding a basket of tech stocks that are down 50%.

(Side note – this is a reminder to have, and use, stop losses – or use smaller position sizing. No one likes to sell a stock that’s been performing wonderfully when it’s down 15% or 20%. But if you’re currently down 50% from a peak, doesn’t having sold at “down 20%” sound much better?)

On the other hand, the good news is that these stocks have now priced in a year’s worth of rate hikes.

Here’s our hypergrowth specialist and the editor of Early Stage Investor, Luke Lango with more:

For (top-tier technology) stocks, sales and earnings are still growing very quickly, meaning that behind their 50%-plus drops is an even bigger contraction in their valuation multiples.

These washed-out stocks are already priced for low rates!

But the rest of the market isn’t. So, when rate hikes do roll around in 2022, the stocks already priced for higher rates will work, while the stocks not priced for higher rates – everything else – will not work.

Sounds crazy, sure. But it has historical precedent. In fact, this is exactly what happened the last time the Fed started raising rates in late 2016.

***It looks like four rate hikes are now priced into tech, or getting close

Below, we look at the CME Group’s FedWatch Tool. This analyzes the probability of rate changes for upcoming Fed meetings.

The chart below shows expectations for where interest rates will be after the December 2022 Fed meeting.

As I write, the highest likelihood of where rates will be lands on the 1.00% – 1.25% range, which implies four quarter point rate hikes from today’s 0% – 0.25% target rate.

Chart showing 30.4% probability of rates at 1%-1.25% by December 2022
Source: CME Group

***If four rate hikes are now priced into the tech sector, then what does history show us about a potential rebound?

Let’s go back to Luke for that:

In 2016, Square (SQ) suffered two 30%+ corrections, Shopify (SHOP) dropped more than 15% on four different occasions, Netflix (NFLX) got washed out by 30%, Amazon (AMZN) collapsed more than 15% twice, and Salesforce (CRM) dropped roughly 20% or more three times.

Then, in 2019 – after the Fed entered its steady rate hike cycle – all five of those stocks rose more than 50%, paced by 150%-plus gains in the two “growthiest” stocks in the group – Shopify and Square.

See the point?

Growth stocks get repriced for rate hikes well ahead of when the rate hikes actually happen because they’re so sensitive to those rate hikes.

So, when the Fed does actually start raising rates, the proverbial band-aid is ripped off, and those stocks start soaring again.

Luke sees the same thing happening here in 2022.

He’s calling for volatility in growth stocks until the Fed actually boosts rates. The current predominant narrative is this will happen in March.

Then, once the Fed gets into a rate-hiking groove – which Luke pegs for mid-2022 – washed-out growth stocks are going to come storming back.

Bottom-line, if you’re looking at your tech stocks, wondering why they’re down so much when the Nasdaq isn’t, now you know.

But the good news is that four rate hikes are priced-into the market, or mostly priced-in.

I’ll give Luke the final word:

Looking out over the long term, we’re as confident as ever in the reality that the technological megatrends we’re invested in are going to reshape the world.

History tends to repeat. That’s what it is doing right now. So, we want to position ourselves on the right side of history by sticking with (high quality) growth stocks…

Once the Fed does hike rates – maybe in March – it will be an inflection point that could spark a big rally in these stocks.

Have a good evening,

Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2022/01/the-real-story-within-the-nasdaq/.

©2024 InvestorPlace Media, LLC