The Blow-Off Top in Tech Stocks Is Nearly Done and Dusted

US stocks had a decent session overnight. The Dow and S&P 500 were up 0.3%, while the NASDAQ was steady. Aussie stocks are set for a modest open after a strong day yesterday.

The stock market rally just grinds on relentlessly.

Meanwhile, the bond market has another set of concerns entirely. As the Wall Street Journal reports:

Yields on U.S. government bonds reached fresh multimonth lows on Wednesday, reflecting investors’ anxiety about the economic outlook and new concerns about the highly contagious Delta variant of Covid-19.

The yield on the benchmark 10-year U.S. Treasury note settled at 1.321%, its lowest close since Feb. 18, compared with 1.369% on Tuesday. 

Yields, which fall when bond prices rise, have been trending lower for months, dragged down by investors reassessing their more optimistic economic forecasts amid signs that Congress and the Federal Reserve might not provide quite as much stimulus as previously anticipated. Underwhelming economic data has added to those concerns, along with new data from Israel suggesting Pfizer Inc.’s vaccine is less effective at protecting against infections caused by the Delta variant.

There’s a lot to unpack there.

Firstly, understand what falling bond yields mean. They reflect the opinion of bond investors that the economy is slowing, and inflationary concerns have receded. All the hype and hysteria about ‘the coming inflation’ has simply distracted investors to what’s really going on.

And that is a broader concern about the ability of the global economy to hold up once fiscal and monetary stimulus start to wane.

Overnight saw the release of the Fed’s minutes from their mid-June meeting. It revealed a discussion about when to start scaling back on bond buying.

The bond market is saying the Fed has it wrong. The Fed is concerned about growth and inflation, the bond market is concerned about the removal of monetary support causing another downturn…or at least a slowdown.

Then there’s the ongoing concern around the virus. The dreaded ‘Delta variant’ (DV) is more infectious but less deadly than the Wuhan lab variant. But you wouldn’t know it based on the fearmongering of our politicians.

Even the left-leaning Financial Review is waking up to the game (12 months too late) being played by our elected leaders. Here’s some rare, rational analysis:

As reported on October 20, 73 per cent of Australians who have died with COVID-19 had at least one (and often multiple) other pre-existing comorbidities, death certificate data reported by the Australian Bureau of Statistics show. These included dementia (41 per cent), chronic cardiac conditions (32 per cent), diabetes (17 per cent) and hypertension (16 per cent).

The average age of COVID-19 deaths in Australia is 85 years — above the age of life expectancy.

Yet our scare-mongering politicians and bureaucrats have terrified millions of relatively healthy and non-elderly people to believe they are at serious risk of dying or getting very sick from the virus.

In the United States last year before vaccinations, the estimated COVID-19 infection fatality ratio (IFR) was 0.002 per cent for under 18s, 0.05 per cent for people aged 18 to 49, 0.6 per cent for 50-64 year olds and a significantly higher 9 per cent for those aged over 65, the US Centres for Disease Control and Prevention says. The most vulnerable are now overwhelmingly vaccinated.

More people than you think see it this way. That’s why the government needs to sell its vaccination strategy by planning a celebrity advertising campaign. Nothing reeks of desperation more than being lectured to by celebrity elites.

Have We Hit the Bottom? Financial Expert Warns Not Yet. Learn More.

More money down the drain…

Meanwhile, I would argue the bond market is concerned about the response to the DV, rather than the DV itself.

The equity market though isn’t concerned at all. Indices in Australia and the US are at or near all-time highs.

But as I’ve been telling subscribers of my advisory, I think we’re getting closer to correction time, or maybe even a decent bear market.

And on that front, I’m watching the NASDAQ closely. I was looking through some charts yesterday and came across a disturbing picture. Usually, I look at charts to find stock opportunities. I mostly confine my searches to the daily charts.

That is, charts that contain daily price action.

But occasionally I’ll look at longer time frames, like weeklies and monthlies. These offer you a higher-level view of what’s going on in markets or individual stocks.

On this front, the weekly chart of the NASDAQ 100 is flashing warning signals. While the price action has been consistently impressive, it’s the underlying momentum that is of concern.

I’ll show you what I mean…

Wchart of the NASDAQ 100

Source: Optuma

[Click to open in a new window]

I use the more concentrated NASDAQ 100 here because it better reflects the huge amount of capital flowing into the mega-cap tech stocks like Apple, Amazon, and Microsoft.

Since the COVID crash, the NASDAQ quickly recovered and reached its old highs by June 2020. Since that time, the index has soared 55%!

Yet on the weekly chart, the peak for momentum (as measured by the relative strength index) was on 17 January 2020. In the huge post-COVID rally, momentum has never beaten that level.

That’s not a big deal itself. But the main point to note is the extreme divergence between price and momentum. Such extremes are rare events. It doesn’t always mean that a correction is imminent. This is a weekly (longer-term) chart, remember.

And it doesn’t say anything about the magnitude of the potential decline. You might just see a short-term minor correction, or a deeper, longer bear market.

My guess is on the latter. The NASDAQ has been in a bull market since 2009. I see the move from the 2020 lows to now (a 50%-plus surge) as a blow-off top.

Tech investors may want to take some money off the table.


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Greg Canavan,
Editor, The Rum Rebellion

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