The tech-heavy Nasdaq 100 Index is showing serious signs of overheating, an indication that a selloff might be right around the corner.
After surging 10% in the past month, the benchmark -- home of the likes of Apple Inc., Amazon.com Inc. and Microsoft Corp. -- has seen its relative strength indicator, a 0-100 gauge of bullish and bearish price momentum, soar to 78, well into overbought territory. That’s seen by traders as a contrarian signal that a decline is imminent, because buying has gotten excessive. Four of the last five times the indicator hit such a level, the Nasdaq 100 shed 12% or more to the ensuing low.
In the first signs of a pullback, the Nasdaq 100 fell Monday for the first time in 11 sessions, snapping the longest winning streak since December 2020. The index sank further Tuesday, dropping as much as 0.8% in early trading, dented by a pullback in Tesla Inc.
“The biggest drivers of the Nasdaq 100 performance over the last month have really been concentrated in a few high-performing stocks, which is notable,” said Chris Berthe, global co-head of cash equities trading at JPMorgan Chase & Co. Indeed, in the past month, Tesla Inc. and Nvidia were among the biggest gainers, adding several hundred billions of dollars in market value.
The latest leg of the rally to a record high had also been fueled by a string of earnings beats from technology companies and the Federal Reserve’s dovish messaging on rate hikes, helping the index beat the S&P 500 by more than three percentage points since the reporting season began in mid-October. But the outperformance can’t go on forever.
“It would be better if this index took a breather,” said Matt Maley, chief market strategist at Miller Tabak & Co. “It would actually help the tech sector rally further into the end of the year.”
The move on Tuesday, however, might not be necessarily a sign of looming double-digit decline, because it can stay at overbought levels for a long period, as in early 2020.
What’s more, Citigroup Inc. strategists say the positioning on Nasdaq future contracts appeared more balanced after a chunk of bearish calls were unwound last week. “However, pockets of risk remain,” strategists led by Chris Montagu wrote in a note.
There’s plenty of news that can help turn sentiment against the tech sector broadly: China’s regulatory crackdown is ongoing, and there are growing signs that companies that benefited from pandemic lockdowns now are suffering as economies reopen.
Monday’s rally in Chinese after-school tutoring stocks, spurred by a report that Beijing will issue new licenses, didn’t last long, signaling that investors expect China’s regulatory efforts have further to run.
PayPal Holdings Inc.’s weak 2022 outlook added to concerns about slowing e-commerce sales, pushing its shares 3.8% lower in premarket trading. Among other pandemic winners, home workout equipment maker Peloton Interactive Inc. is the worst performer in the Nasdaq 100 this year with a drop of 66% and Zoom Video Communications Inc. is down 23%.
Meanwhile, e-commerce behemoth Amazon has risen just 7% in 2021, underperforming the Nasdaq 100’s 27% surge.
Tech Chart of the Day
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Roblox soared 29% after the video-game platform reported third-quarter bookings that beat analysts’ estimates, signaling that summer vacations and the loosening of Covid restrictions haven’t dented users’ enthusiasm for online games.
- Retail trading online platform provider Robinhood said a security breach on Nov. 3 resulted in an unauthorized party obtaining the email addresses for around 5 million customers while the full names for a different group of approximately two million customers were accessed. The stock declined fell 3%.
- Zynga jumped after the video-game developer raised its adjusted revenue forecast, which matched the average analyst estimate. However, its mobile daily active users came in below expectations for the third quarter.
- Google parent Alphabet Inc. rallied Monday to breach $2 trillion in market value for the first time, fueled by a rebound in spending on digital ads and growth in its cloud business.
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Advanced Micro Devices will start supplying server processors to Meta Platforms, formerly known as Facebook, further eroding Intel’s hold on that lucrative market. Its stock has surged 64% this year.
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Read more articles by Thyagaraju Adinarayan, Elena Popina
