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Nasdaq Index Analysis
Yesterday we saw the Nasdaq 100 index trade up to and slightly beyond the 15,000-price level. Making a new all-time high and ticking off a really big target level. The 52 weeks stats now stand at a 52-week low print of 10,313.94 versus a 53-week high print of 15,002.28.
Not all of the 100 companies within the Nasdaq 100 are doing as well as each other and this can be measured by the percentage of companies above their key averages. 85.29% of companies within the Nasdaq 100 Index are above their 200-day average. Just over half at 54.90% are above their 5-day average price. With the overall index touching 15,00 and a new all-time high, it is interesting to note that only 40 of those companies were able to make a new high in the last 5 days.
Yesterday’s record high was pushed along by some usual suspects like Alphabet and Microsoft. Pepsi Co who beat earnings expectations were in the top 10 risers, but the largest gains were in Mercado Libre Inc.
Mercado Libre, Inc. is an Argentine company incorporated in the United States that operates online marketplaces dedicated to e-commerce and online auctions, including mercadolibre.com. As of 2016, Mercado Libre had 174.2 million users in Latin America, making it the region’s most popular e-commerce site by number of visitors. The company is heavily invested in bringing FinTech to Brazil as a huge number of consumers do not currently bank. The populations for many reasons don’t have access to financial services, leaving an enormous amount of transactions still done with cash. Clearly a very large growth story in the making.
At the opposite end of the recording breaking day, Amazon.com Inc and Tesla were down the most.
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Tesla’s share price had tumbled from the US session open and closed towards the lows of the day. Currently Elon Musk is testifying in a trial in which he is accused of pressuring Tesla board members into buying SolarCity, the solar panel firm.
Amazon who was the worst performer yesterday may have lost its shine as the companies $8.5 billion acquisition of the movie and TV studio MGM is set for a lengthy investigation by the Federal Trade Commission (FTC). The FTC has issued a second request in its review of the transaction and that this would likely result in it taking months to make a ruling. The uncertainty is what investors cannot tolerate. Jeff Bezos stepped back from the day-to-day operations of the business last on the 5th of July 2021 and handed the reins to Andy Jassy. Bezos is now a strategic advisor to the CEO in an executive chair role.
Yesterday was also a big day for the US inflation data as the markets received the latest US Consumer Price Index readings.
US headline CPI is now up to 5.3%, with CPI measuring the average monthly change in the price of goods and services. Recently the inflationary pressures have come from energy due to the rising oil prices and food, but more so from the cost of buying a second-hand car or truck.
In the past year, the worry around rising inflation would have had a negative impact on the Nasdaq prices as seen back in February 2021 through to March 2021. The types of good and services associated with this current rise in inflation means the markets are currently onboard with the Federal Reserve’s assessment that this is transitory and that inflation expectations are not running too hot. Yet!
Looking at a comparison between the Treasury Inflation Protected Securities (TIPS) versus the Nasdaq 100, the graph shows a pretty clear-cut inverse relationship. With falling TIPS resulting in rising Nasdaq prices.
TIPS are a way to protect portfolios from inflation as well as profiting from it because they pay interest every six months based on a fixed rate determined at the bond’s auction. Investors buy into TIPS as they receive higher interest or coupon payments as inflation rises. Currently the inflation rate is running higher than the benchmark yield and investors are accepting the costs of owning these assets while the risk of rising inflation and possible rate hikes are being signalled. During these uncertain times, the fear of losing your principal investment is greater than your need of better returns. The Fed is removing $120billion of the highest-grade collateral from the system each month and fixed income products could become the go to asset to have if there is a flight to quality. If there is a surge in demand and supply has been cut drastically, there will be a parabolic move in the US treasuries.
Looking at a chart which compares the Dow Jones Transportation Average with the Dow Jones Industrial Average, it is becoming ever clearer that something is not working in the transport index. We have before discussed the signal that Dow Theory sends when the two indices do not mirror each other’s moves, and currently this signal remains bearish.
US 10-year benchmark yields continue to show that March 2021 was the peak and that there has been a decisive move into the safe haven assets of the 10-year notes. Long term bonds are also creeping higher and other than tech and retail stocks the markets are beginning to look like they are going to struggle to make exponential gains.
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Trading the Nasdaq 100 has to be to the long side currently as the momentum and price action are both to the upside on the higher time frames, such as the monthly chart above. Using a Fibonacci extension tool and anchors at the March 2020 low and subsequent swing high and low to define the range, the upside extension targets are 15,340 for a measured move, all the way towards 18,000 for the first fib extension. That said buying an all-time high is not my favourite strategy, so waiting for a pullback intraday is key for me.
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Depending on your time horizons, the method I am using currently is to trade in-line with a higher time frame when that time frame is showing the 20,50 and 200 period moving averages on top of one another, for a long bias.
Then on a smaller time frame waiting for the stochastic indicator (10,3,3) to signal an oversold period, where the stochastic indicator moves below the 30 level. Then my entry is on a new close above the 20-period moving average, assuming the 20,50 and 200 period ema, on this smaller time frame are also stacked bullishly. The stochastic indicator doesn’t have to be oversold on the trigger, but it can prove to be the better trade entry. Waiting for the current price to print above the previous candle’s high is also a good filter to the long side as it shows buyers willingness to trend higher again having found value.
Using the H1 and m5 charts mean that the moves are quick and my time in the markets is reduced which for me means my risk is reduced. Using higher time frames and smaller leverage would mean you could potentially ride the Nasdaq as it is making good gains weekly. Finding a methodology to suit you is key, but the set ups are the same across all time frames.
Also, for me using the smaller time frames means I can be in and out before and after the news events and also take a fresh look at the markets at daily intervals to see if the tide has turned in any way, as the markets are signalling in different areas that there is a move to safe havens and not all parts of the economy are onboard with this reflation trade.
If the 15,000 level were to prove to be a solid ceiling, it will be the buyers taking profits that first cause the index to drop significantly. On the pullback towards the ATH’s if there are no longer more buyers than sellers, this will be the time to get on board for a short. Using correlations like the TIPS v’s the Nasdaq 100 could be a good conformation tool.
