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Nasdaq Index Analysis

The month of April has been great for the Nasdaq as it reaches new all-time highs, following the exponential appreciation in the S&P500 and DJIA this year.

The Nasdaq was late to the new all-time highs party as the tech industry became very sensitive to the increased yields that were signaling inflation expectations and probably interest rate hikes. The tech sector benefitted the quickest from the reflation trade post the pandemic lows last March as the stay-at-home economy leveraged the technologies and new ways of doing business.

Yields across the duration are flattening off and this should alleviate some fears that the FOMC will have to backtrack on their late 2023 rate hike predictions. The steepening of the curves will be put down to speculators trying to front-run or force the hand of the Fed, whilst being fuelled by the mains stream media economists as a handy narrative. The Fed is in a blackout period, so we won’t know their thoughts for the near future and so the equities markets are succumbing to news from other regions.

We’re also currently in the US earning season, and I fully expect that the corporations will generally beat market expectations on earnings, as they will have also benefitted greatly from the huge amount of stimulus that has been pumped into the US economy for over 12 months now. Covid-19 and its variants are putting a dampener on proceedings as certain continents suffer more than others, but vaccine rollout and an ever-increasing number of people returning to work will benefit the global economy as a whole. Things will be different and there is no rush to ditch the Zoom meetings any time soon, and the new green economy will be more reliant on tech than ever before.

This USA is still at the top of the COVID-19 table for most cases, but in their defense, they have tested many more people. The major worry is that they are also at the top of the global deaths table but again, anyone who died having tested positive for COVID-19 regardless of if it were death by falling tree, gets written down as a Covid death. The vaccines will help slow these metrics down and the main concern is from Brazil, India, and the Far East.

Last night shares in Netflix fell quite sharply in after-hours trading when the company released its latest quarterly update. Worse-than-expected subscriber growth during Q1 spooked some investors. This compounded on the bad news theme as Tesla had previously been in the news after a crash that resulted in the death of 2 passengers, plus we learned that the US Senate was a step closer to break up the biggest of tech firms (as they perceive them to be too powerful and monopolistic), resulting in the Nasdaq having a tough time these last few days.

The sea of red across the S&P stocks versus the little pockets of green from the likes of Healthcare and Utilities is telling and as traders move to more defensible stocks and away from the risk-on we can assume today’s price action in the Nasdaq will be similar to the rest of Aprils market downturn.

The headlines should become more favorable again and when the weak hands are all flushed out, the trend should continue higher for the Nasdaq and its peers. Keeping an eye on the Volatility Index (VIX) is one way to see how fearful the market really is. Currently, the VIX is trading around 18, whereas during peak pandemic crisis it traded up to 85. There is a little bit of increasing volatility, so taking a more optimistic look is the way forward for now. Just keep your eye on it.

Good data is good news and Netflix subscribers rose by 14% to nearly 208 million. Their revenue grew by 24.2% to $7.2 billion, average revenue per membership increased 6% and their operating margin hit record highs by 27%. This is not a company that is failing, and it is clearly taking market share within its sector and looking to get back on track with content creation as the pandemic restrictions allow them to. The Netflix share price has been trading in a reasonably tight range since last summer, but the market structure does not suggest that we are in any way making new swing lows and lower swing highs. When the sentiment around these frothy markets changes to be more bullish, this data will form a good foundation for the likes of Netflix. We wait and see how well everyone else has done.

We’re more than halfway through the month of April 2021 and the monthly candle on the Nasdaq is big and green. Profit-taking amid uncertain times is wise and the fact that the price action found support at a previous monthly consolidation period suggests that buyers are confident in where the floor is. It may be 1000 points lower but with the driver of that correction recently down to 12,000 was the rise in yields and as previously said that is less of a concern now.

Looking at the daily chart we have a small area of balance that was the base for the rise to ATH’s and if we were to test around the 13580 levels, this is where I would be interested to see how much buying pressure came in. Traders who missed out on the April run-up may be looking for the breakout of the previous March 17th swing high, and if so, I’ll be looking for buying opportunities around the 13,165 to 13,000 zone.

The ActivTrader sentiment indicator shows that 61% of traders believe in this rally, so until we get to peak jubilation where say 89% or more of retail traders are long, I don’t think this recent high is the market top. Ultimately anyone long the Nasdaq would welcome some pullbacks and the ejection of weak speculative hands, as trading the all-time highs becomes more fractious and erratic with little market structure to limit your risk with. When we have testes some swing highs and put in place new market structure investors feel more confident in adding to their positions or initiating new ones. The key takeaways for me are, monthly momentum is very bullish again and the daily fluctuations on headline news should give way to great fundamentals.

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