A huge bull run on NASDAQ futures looks increasingly tired
We have seen an incredible run higher in the tech-heavy NASDAQ in 2023. Since posting a low at 10751 in early January, the e-mini NASDAQ 100 futures have barely looked back, rallying by a whopping 35% to its latest peak of 14570 on Monday. However, there are a few signs that suggest the run is beginning to look tired. This may be setting up for a correction that would weigh on broader markets too.
- Safe haven tech might have reached a peak
- The terrible market breadth in the rally
- Other markets have been stumbling for a while
- Technicals are suggesting an exhaustion
Resolution of the debt ceiling may not help tech stocks
The US debt ceiling has been hanging overhead for investors. This has dragged on broad sentiment for equities in recent weeks. However, one area of the market that has been a beneficiary has been the big-tech stocks. Despite US Treasury yields going higher (which should weigh on the performance of the growth stocks, investors have eyed them as safe haven plays.
The performance of the likes of Microsoft, Alphabet, Meta Platforms and the stock of the moment, Nvidia has ranged from the extremely impressive to the incredible. Here’s a chart of how some of them have performed. I have highlighted the run in recent weeks, much of which has happened in the wake of quarterly results.
You might notice that I have not included Meta or Nvidia on this chart. The reason is that their performance has been so incredible in 2023 that it would ruin the visualisation of the chart. However, just for your reference, Meta is up 120% year to date, with Nvidia up just a casual 159%!
However, what the chart does show well is the significant outperformance of growth stocks (i.e. from the NASDAQ) over value stocks.
However, could this be about to change? With the saga of the US debt ceiling apparently, in the process of being resolved, this safe haven flow might now just begin to reverse. It is certainly something to keep a watch on.
Market breadth is a warning sign
One key factor that is bubbling under the surface is that the broader US equity market is not as strong as the run higher in the NASDAQ would have you believe.
Look at the market breadth of the major US markets. The Advance/Decline lines for the S&P 500 and the Dow Jones Industrial Average are at six-week lows. The broader NASDAQ Composite has an Advance/Decline line that has been falling for a while and even for the NASDAQ 100 it has been broadly flat in recent weeks.
Now, this tells me that only a very few stocks (such as Meta and Nvidia) are driving the gains. However, it is important to remember that this is not an immediate profit-taking signal. These Advance/Decline lines can continue to diverge for some time. However, importantly, it gives us a warning that this move is not that healthy.
Other major markets are struggling
Away from the huge gains of the NASDAQ, we see other major markets have not been having such an easy ride. Central banks continue to tow a hawkish line to fight inflation, whilst the threat of impending recession is also weighing on sentiment for several major markets.
I spoke earlier about the huge outperformance of growth over value stocks. This is reflected in the significant underperformance of the Dow in the US and the FTSE 100 in the UK.
The S&P 500 has been clawing for new multi-month highs (helped by the big-tech weighting) but has never managed to move on. In Europe, the DAX and CAC have also been struggling and are increasingly threatening a correction.
It is difficult to believe that if the e-mini NASDAQ 100 futures did see a corrective move, it would not also weigh on other major markets too. The NASDAQ has been an exception to the rule in recent weeks.
Technical signals point to an exhaustion on NASDAQ futures
The run higher on the e-mini NASDAQ 100 futures is beginning to look tired. The uptrend channel has been impressive since the turn of the year. However, exhaustion signals are beginning to pop up.
The market has again rallied towards the top of the trend channel. In itself, this is not a signal for profit-taking, but it might be restrictive at the least.
However, this is also coming with the daily RSI which has begun to falter above 70. This happened in early February and early April and coincided with a period of correction in the futures. The drawdown ranges from around 4% (c. -550 ticks) to around -10% (-1275 ticks). On both occasions, the daily RSI unwound towards 40/45 before the rally kicked in again.
Subsequently, if this sort of profit-taking move were seen again, it could mean a potential unwinding back into the 13350/14000 range in the coming weeks. This would not be a bearish move but would give investors a chance to re-set and see where the land lies as the summer lull takes hold.
Steve Miley
Co-Founder of TradeDay.
Steve is the former head of Technical Analaysis research at Merrill Lynch and Credit Suisse, and owner of the award winning research boutique Market Chartist.
