QQQ may have answers for NASDAQ questions

U.S. markets have returned to a pattern that is almost opposite to the one that prevailed for around a fortnight.

NASDAQ returns refreshed after the break

After the 4th July break, U.S. markets have returned to a pattern that is almost opposite to the one that prevailed for around a fortnight. For the first half of Wednesday’s session at least, investors watched a reversal of what was, over the past few weeks, a broad rotation away from the tech-heavy NASDAQ 100 in favour of the broader S&P 500.

Was that it?

NASDAQ’s slide extended to almost 5% month-on-month at one point last week, but on Wednesday, even after a mild fall early on, the S&P 500’s monthly loss, at last check was just 0.2%. That means U.S. stocks could still be at a pivotal juncture. If things plays out as the recent pattern suggests, higher-yielding more established sectors will come back into prominence, reflecting a swing back to one side of the historical ‘value’ vs. ‘growth’ dichotomy. The latter category supposedly covers newer, often techier industries, with faster, albeit more volatile share price returns and—often—slower reimbursement from dividends, etc.

Financials back ‘Value’

With large technology stocks the main propulsion behind the up leg that began following the election of President Donald Trump, tech is a key seat of anxiety now the wheels may be coming off the rally. By contrast, one of the heaviest weighted ‘value’ sectors–financial companies—got a new lease of life in June, underpinned last week after all large banks passed Federal Reserve stress tests, paving the way from higher dividends. With help from a steepening yield curve as the Fed sticks to its tightening path despite a sceptical market, financials could have more fuel in the tank after becoming the fastest rising sector over a month with a 6.8% swing. If so, continued support for ‘value’ would be implied, weighing on NASDAQ anew.

What the tech sector does have on its side is a broad expectation that the upcoming quarterly reporting season will be another solid one. An 11% aggregate forecast for the S&P 500 Info Tech sector, if proved correct would, like the prior quarter, be the best earnings performance by any segment.  All told, investors are obliged to keep tabs on the dichotomy one way or another, particularly during Wednesday’s session when further Federal Reserve pointers might be revealed within the minutes of last month’s FOMC’s policy meeting.

Can QQQ hold the line?

One arena in which bullish and bearish investors will hash out the debate is one of the largest trackers of the NASDAQ 100, the Power Shares QQQ Trust ETF. Like the NASDAQ 100, QQQ excludes banks and other financial companies. I outline some key points about its technical chart below.

  • Last month’s messy NASDAQ breakdown after all-time highs is mirrored in QQQ, as is the destruction of the rising channel that ran between April and shortly after the early-June peak
  • I have identified next proven support as $136.05-$135.7. It’s the region where the market bounced at the end of April and the middle of May
  • The clarity of those upward reversals, particularly on 18th May points to backing from larger investors, raising the possibility that buying interest remains around the region
  • Overhead impediments continue to look formidable though, regardless of the strength of NASDAQ’s 1.2% rebound at the time of writing
  • For QQQ, continued resistance is likely at $137.5. That price has been both support and resistance several times since early May
  • 38.2% of the March-June up leg ($138.36) was not passed unchallenged on the downside and may therefore be problematic from below
  • If the confluence of resistance within $137-138.5 is surpassed, it could confirm that the recent tech sell-off has run its course

Figure 1 – Technical chart: PowerShares QQQ Trust ETF Series 1

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