Technology stocks, once the darlings of the market, have hit a roadblock in recent days and show signs of impending decline.
The Nasdaq 100 and Its Key Drivers
The Nasdaq 100, comprising the top 100 nonfinancial companies on the tech-focused Nasdaq Composite, has enjoyed a 47% surge this year. The remarkable growth in Microsoft, Nvidia, Meta Platforms, Alphabet, and Amazon shares has been instrumental in driving this index upward. These companies have harnessed the power of artificial intelligence to enhance their products and services, leading to additional revenue streams. Apple and Tesla also contributed to the Nasdaq 100’s success.
Unexpected Downturn
However, tech stocks have experienced a slight dip this week without any apparent reason. Currently standing at around 15,900, the Nasdaq 100 has fallen nearly 1% from its recent closing high of 16,027. This decline is noteworthy because it coincides with a decrease in Treasury yields—a peculiar pairing that defies expectations.
Since November 24th, the 10-year Treasury yield has dropped from slightly above 4.5% to roughly 4.3%. Ordinarily, this shift should propel tech stocks upward. Lower yields on longer-dated bonds tend to increase the value of future profits, which aligns with the valuation models of many tech companies that anticipate substantial profits in the years to come. However, this anticipated boost has not manifested for major tech shares this time around.
Troubling Signals for Invesco QQQ Trust Series 1
The Invesco QQQ Trust Series 1 (QQQ), an exchange-traded fund that tracks the Nasdaq 100, faced some concerning indicators this week. Despite hitting a new 52-week intraday high on Wednesday, the ETF closed 1% below that peak and ended the day in the red. This scenario has occurred only 63 times since 1999, as indicated by BTIG. While historically the ETF has shown positive returns in the month following such events, there have also been instances of significant declines, such as in March 2000, October 2007, January 2018, January 2020, and November 2021.
While it is unlikely that the Nasdaq 100 will experience a catastrophic decline like in 2007, where it fell by double digits in percentage terms, there is still a possibility of further declines, particularly considering the significant run-up prior to the drop from the 52-week intraday high.
BTIG’s chief market technician, Jonathan Krinsky, stated that even if Wednesday’s events do not mark a significant turning point, a short-term pullback is probable due to the QQQs’ year-to-date performance. Moreover, unless there is a substantial decrease in bond yields, tech stocks remain vulnerable to selling pressure. This is because investors have heavily invested in these stocks throughout this year. According to Bank of America, fund managers held higher positions in tech stocks relative to the past 20 years leading up to November. Additionally, in October, fund managers increased their tech stock holdings more than any other sector.
Bank of America further notes that Big Tech has become the “most crowded” trade in financial markets. Therefore, it is unsurprising that investors may choose to capitalize on their profits and sell their tech stock holdings.
Tech Stocks: A Cautionary Note
While tech stocks have seen impressive long-term gains and are predicted to maintain double-digit profit growth in the coming years, it may not be advisable to buy them at their current levels. Market experts anticipate a healthy decline in the near-term.
It is essential to exercise caution and carefully evaluate the risks before making investment decisions related to tech stocks.
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