The financial markets are experiencing a turbulent phase, with the Nasdaq 100 recently enduring a notable decline over the past three weeks. This downturn has erased much of the gains achieved in the wake of the US presidential election, raising concerns among investors about the future trajectory of US equities. The Nasdaq 100, which hit an all-time high of 22,874 on December 16, 2024, is now facing significant headwinds, as it has retreated to levels around 20,784. These shifting dynamics invite a deeper analysis of the factors influencing this tech-heavy index and what it signals for potential investors.
Central to understanding the Nasdaq’s recent struggles is the persistent upward trend of the 10-year US Treasury yield, which has made many US stocks appear overvalued. With the Shiller excess CAPE yield—an indicator of stock valuation relative to long-term bond yields—declining sharply from 1.94 in September to just 1.10 in January, it becomes evident that equities are increasingly less attractive when compared to government securities. The pressure from rising long-term borrowing costs is constraining profit margins, negating some potential benefits from anticipated policy changes, including deregulation and tax reductions under the current administration.
This environment increasingly suggests that investors will need to reconsider the attractiveness of risk assets such as equities, especially in the face of diminishing returns as represented by the waning excess CAPE yield. Such reassessments are critical in an era where many portfolio managers seek stable returns against a backdrop of heightened uncertainty.
The technical indicators for the Nasdaq 100 paint a picture of cautious sentiment amongst investors. A key metric, the percentage of component stocks trading above their 200-day moving averages, has plummeted from a striking 70% to just 53% within just over a month. This decline indicates a weakening market breadth and suggests that the uptrend which characterized the index since October 2022 may be faltering. Weak market internals often precede significant corrections, prompting investors to tread carefully as the index wrestles with its support levels.
Furthermore, underlying momentum indicators like the Relative Strength Index (RSI) reveal a continued series of “lower highs and lower lows,” indicative of bearish pressure. The lack of oversold conditions reinforces the notion that any potential rebounds may be limited in duration and impact.
At this juncture, the critical support level for the Nasdaq 100 has been identified at 20,790, which forms a key downside trigger. The index’s recent intraday low of 20,538 is a stark reminder of the fragility in the current market. Should the Nasdaq 100 breach this crucial support, it may open up the floor to further declines, forcing investors to confront the potential for a more protracted market correction.
Conversely, if the index can consolidate above 20,790 and stages a rally, it would need to decisively overcome resistance levels situated between 22,470 and 22,980 to regain bullish momentum. Such a breakout could signal renewed investor confidence and a resumption of upward price movements, with eyes on higher targets around 23,980 and beyond.
As we navigate this evolving landscape, investors need to strike a delicate balance between cautious optimism and prudent risk management. The interplay of rising Treasury yields, diminishing market breadth, and key support levels will shape the Nasdaq 100’s performance in the near term. In a market characterized by volatility and uncertainty, maintaining awareness of these indicators will be crucial for investors seeking to make informed decisions, guarding against potential losses while remaining poised to capitalize on any opportunities for recovery.
Investors must remain vigilant to the evolving market signals to strategize effectively in what may continue to be a challenging economic environment.