Could the Nasdaq have really started running too far when it only came back halfway? That’s a key question posed recently by the recent rally in the Nasdaq 100, which has now recovered just over half of the bear market’s losses from its November 2021 close high to its Q4 2022 low. In the process, it has consolidated the NDX and half a dozen Massive growth stocks that have dominated the S&P 500 to the top of its nine-month range while drawing scorn from many junk investors who fear the recent rally is too narrow, too heavy and too dependent on AI noise to be trusted. . This particular conversation is totally chewed up, and I had it last week and the week before. Suffice it to say that market weakness is neither ideal nor fatal to higher prices, but it would be more troubling if it encouraged widespread optimism rather than the mixture of discontent and half-hearted justification that was more of a situation. And perhaps more pertinently, the past week has seen at least initial signs of a desirable expansion. Recently struggling cyclical groups have stabilized. The small capital Russell 2000 bounced back to avoid the collapse of a potentially messy scheme, and regional bank stocks are now more than 10% above their recent fear-infused lows. This modest improvement in non-big tech market expansions seems dependent on macro trajectories and policies simply not worsening fast enough for investors to reduce equity exposure beyond current muted levels. The framework of a debt-ceiling deal is visible even if negotiators have incentives to make it seem far-reaching up until the moment of agreement. The housing numbers, unemployment claims, and retail sales are consistent with moderate but positive GDP growth. And while bond yields eased to the upside slightly, the chances of the Federal Reserve keeping interest rates steady next month appear greater, for now, than the chances of another hike. It’s also worth noting that the recent rally in the familiar giant Nasdaq charts has a lot to do with the mean rebound, after the Nasdaq lagged behind the equally weighted S&P 500 in 2002 by 20 percentage points. The NDX has been in a long-term structural uptrend relative to the S&P 500 for the past decade. As this chart shows, the index exploded into a significant uptrend that surpassed that trend during and after the Covid pandemic, and then collapsed below it. He’s now back on the post-2013 channel, for what it’s worth. The story is almost the same in terms of evaluation. In late 2021, NDX traded at forward earnings 31x, which fell to 19x in late 2022. It’s now back at 25x. Microsoft’s P/E path was 35x to 22x to the current 29x; for alphabet, 26x to 16x to 21x; and Meta Platforms, 26x to 11x to 19x. The only outlier, Nvidia, is also the lead given to its AI tease, which now has 63x expected earnings, almost back to its peak of 66x. It is impossible to say with confidence how much hype in the AI narrative, urgent real corporate investment and life-changing technology, or the simple continuous process of software getting smarter and faster – has been happening for half a century. It’s certainly the new moving narrative for growth investors and perhaps an excuse to appreciate earnings. But it’s just that, apart from Nvidia, the top techs traded in pricier valuations 18 months ago, before anyone had even heard of ChatGPT. Regardless of the merits of the AI story and the granting of stock trading back for solid valuations, the Nasdaq 100, which hit a 52-week, 18-month high last week, is not among the weak points on the upside. Carson Investment Research looked at all 14 cases since 1985 when the Nasdaq 100 reached a new 52-week high after at least six months without one. Each time, the index has been higher one year later to achieve an average profit of nearly 15%, with only one episode – from 1990 – involving a wicked drop in between. All that said, the Nasdaq is riding very hot in the short term, with momentum readings reaching levels seen near the peak of previous tentative rallies in early February and this past August. Cantor Fitzgerald said the Nasdaq 100 hit the RSI at 73. Since 2018, the company said, the index has risen only about half the time in the 20 and 60 days after the RSI crossed 70. There sure was some big swings in that sample. . While trader attitudes and investor sentiment were broadly cautious, speculators late last week began chasing more aggressively with very high call options volume on Thursday’s slope. As noted, the S&P 500 touched 4200 late in the week before pulling back slightly. This is widely seen as the cap of a familiar and stubborn group, and with good reason. The index has only traded above 4,200 for all 10 trading days in the past year and hasn’t closed completely there yet this year. (Although, unlike the recent close approach of 4,200 in early February, both the 50- and 200-day trends are now tilting higher.) With monthly options expiring on Friday, the market sometimes trades “more loosely” with less attractive drawdowns. . Contracts with an approximate number of cluster bets, such as 4,150 and 4,200. Some negative chopping, slow spinning and digestion should be expected soon, if not immediately. It has been an uninspired and erratic rally since October, with late-cycle shadows encroaching on the economy. The market’s resilience in the face of the nearly year-long recessionary vigil and the Fed’s reckless tightening campaign has made it a cushion to prevent any turbulence that might occur.
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