Tech on the verge
06/06/18

Now it’s the Nasdaq’s turn.

Hey, it has to happen someday, right?

Yesterday the Nasdaq 100 index (NDX) rallied just a bit short of its all-time high (7186.09 from March 13), although it posted its second-consecutive record close.

The tech benchmark finds itself in a situation similar to the one the Russell 2000 (RUT) was in a couple of weeks ago, when on May 16 the small-cap index finally (after two earlier tries) broke out above its record peak from January. As of yesterday, the RUT had rallied more than 2.6% above the May 16 close, and posted fresh record highs the past two days.

Also like the Russell, the NDX has approached its previous high with some momentum, kicking off June with a 3% rally (as of yesterday’s high) and maintaining its dominant position among the major US stock indexes.

Nasdaq 100 (NDX), 1/25/18 – 6/5/18. Nasdaq 100 (NDX) price chart. Run to the highs

Source: OptionsHouse


The Russell may have stolen some of the Nasdaq’s headlines in recent weeks, but in truth the NDX was never in danger of losing its market-leading status. It was the only index to never flip into the red on the year, and as of yesterday, its YTD return was around 12%--a healthy bit ahead of the RUT’s 8.3% and miles ahead of the S&P 500’s (SPX) 2.8%. (Let’s not talk about the Dow.)

Momentum can be a fickle mistress, of course, so some contrarians are likely pointing out that a downturn at the implied resistance of the NDX’s previous high wouldn’t be a surprise. They’re right. But it’s also fair to point out that tech—relative to other areas of the market—has still been one of the best bets to buy on dips, even during February’s correction. The NDX can go down hard, but it also tends to bounce back up with gusto. So aside from the prospect of new index records, a good question is whether tech is likely to surrender its status as market leader any time soon.

One Wall Street shop apparently doesn’t think so. Maybe you’ve heard of them—Goldman Sachs. While some worried voices have raised the specter of an overheated tech sector, GS recently published research arguing the current tech rally is inherently healthier than the one that ended in the 2000 dot-com implosion because this time the leaders’ gains are based on profits rather than pie-in-the-sky expectations of future growth.

The authors of the study say that over the past 10 years, Facebook (FB), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and Google/Alphabet (GOOG)—which they designate as the FAAMG stocks—have seen 87% of their collective share increases come from profits, and only 13% from increases in price multiples—better numbers than those for the rest of the market.1

The following chart shows the YTD performance of three of these stocks—AMZN, AAPL, and MSFT—along with the NDX. Facebook and Google were left off because their returns were a bit below the NDX’s, while FAANG staple Netflix (NFLX) isn’t shown because it’s return is more than double its nearest competitor. But at a glance, it’s clear these stocks have weathered the recent storm better than most.

Nasdaq 100 (NDX), Amazon (AMZN), Microsoft (MSFT), and Apple (AAPL), 12/29/17 – 6/5/18. Still leaders of the pack. FAAMG stocks. FAANG stocks.

Source: OptionsHouse


And about that possible NDX breakout and record high: Unlike the analysis of Russell breakouts, which indicated RUT had favorable odds of upside follow-through after its May breakout, analysis of similar NDX breakouts (in this case, a day that makes a new 60-day or longer intraday and closing high) have tended to be followed the next five days by price action that is, on average…well, pretty average (but still bullish).

And while we’re at it, maybe it’s time for a new tech acronym. Since Google is really Alphabet, and Microsoft has arguably earned entry into the club, let’s just go with FANAMA (rhymes with Panama).

 

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1 Bloomberg.com. Goldman Sachs Doesn't Think There's a Bubble in Tech Stocks. 6/4/18.