Is the out of favour NASDAQ due a reprieve?

The first quarter has been notable for the “yield play” rotation out of high growth into cyclical stocks. In this article we review key reasons why the rotation may have gone far enough for now.

Tech (2)

As has been the way during the first quarter of 2021, the rotation out of high growth/tech-heavy indices into those with a higher percentage of cyclical stocks continued overnight as the Dow Jones index made fresh all-time highs, and the NASDAQ closed marginally lower.

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A commendable performance in the face of headwinds that include;

  • The unwinding of the Archegos hedge fund book that resulted in a $20bn distressed stock selling spree after the hedge fund failed to meet margin calls.
  • Another ratchet higher in US yields, ahead of President Biden's announcement on Wednesday of a $4tn infrastructure plan.
  • Continued talk of large end-of-month/quarter selling of US equities to rebalance portfolios.

The NASDAQ’s ability to shrug off the move higher in yields offers a clue that after two months of underperformance the index may be due a reprieve. This may be a result of anticipated consolidation in the bond market after it received further dovish reassurance overnight from a Fed speaker.

In his first speech since joining the Board of Governors, Fed Governor Waller said that the Fed is “a long way from raising rates at this point” and went as far as to say that if the sell-off in the rates market becomes disorderly "we might have to step in just for financial stability reasons."

It may also be based on technical reasons. As can be viewed on the chart below after a -12% pullback from the mid-February 13900 high, the NASDAQ has reclaimed the neckline of the head and shoulders top, thereby negating it.

Furthermore, the NASDAQ last week held and bounced from the uptrend line drawn from the March 2020, 6628 low to the March 2021, 12207 low, keeping the uptrend intact.

Should the NASDAQ remain above the aforementioned trendline support on a closing basis and then break above the series of late February and March highs 13350/360 area, it would open the way for the NASDAQ to retest year to date highs at 13900.    

Source Tradingview. The figures stated areas of the 30th of March 2021. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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