Nasdaq 100 analysis: Tech stocks in focus as Fed turns hawkish
15:18, 7 January 2022
The Nasdaq 100 Index – comprised of the 100 largest technology companies in the United States – had a bumpy start to the New Year, losing as much as 5% of its value on the week.
Anxieties about monetary tightening proceeding faster than expected this year weighed heavily on high-growth technology stocks during the week.
The publication of the Federal Open Market Committee minutes, as discussed more in details here, was among the primary drivers of this week’s decline in tech stocks. Fed board members signalled their readiness to accelerate rate increases and then begin shrinking the balance sheet in order to contain increasing and persistent price pressures, fuelling investors’ concerns about a liquidity squeeze later in the year.
Thus, monetary policy is once again in focus for the fate of the index, and US real yields appear to be one of the key factors to monitor for its performance in the coming period. A persistent increase in US real rates has traditionally been related with the underperformance of technology stocks relative to the broader stock market.
Technically, the index is testing the support of a rising parallel channel that has been in place since early March 2021. A break through the support might increases chances of the index falling to the psychological level of 15,000, while a rebound above the median channel line might lead to an extension toward the resistance.
Worst day since March 2021
Nasdaq 100 Index 1-day rolling % change – Credit: KoyfinThe Nasdaq 100 Index posted its worst daily performance (-3.1%) since March 2021 on 5 January.
Microsoft (-6.8%), Apple (-3.2%), Alphabet (-5 %), NVIDIA (-4.1%), Netflix (-9.3%) and Adobe (-10%) were the main contributors to its negative weekly performance.
What is your sentiment on US100?
Fundamental analysis
The Nasdaq 100 Index’s trailing twelve months price-to-earnings (P/E) ratio – one of the main measures used to assess market valuation – is 28.49x as of 7 January, moderately higher than the past decade’s median of 22.18.
The P/E ratio varies significantly among the Nasdaq 100 industries, with software having the highest P/E ratio (45x) and tech hardware having the lowest (12.8x), according to data provided by SimplyWall.st.
| Industry | Price to Earnings | Forecasted Annual Growth |
| Software | 45x | 17.65% |
| IT | 36.1x | 16.77% |
| Semiconductors | 31x | 15.62% |
| Communications | 26.5x | 8.58% |
| Electronic Equipment and Components | 18.4x | 15.18% |
| Tech Hardware | 12.8x | 1.36% |
Source: SimplyWall.st; data as of 7 January
As previously mentioned, shifts in the US Federal Reserve’s monetary policy stance are a major driver for the stock market’s performance and particularly for technology companies.
A Fed inclined to tighten monetary policy more aggressively than anticipated presents a danger to technology stocks that already price in high future growth rates since rising interest rates diminish future cash flows by increasing the cost of the investments required to maintain strong growth rates.
US real yields – the difference in yields between US Treasury securities and US breakeven rates – are a critical indicator to monitor the Fed’s monetary policy stance.
Rising real yields are associated with a Federal Reserve shifting toward a more hawkish position, which has traditionally led to the index’s underperformance relative to the S&P 500.
US real yields vs Nasdaq-to-S&P 500 ratio – Credit: TradingViewTechnical analysis
As previously mentioned, the Nasdaq 100 Index is testing a support of an upward parallel channel that has been in place since March 2021. On the previous three times when the index hit the channel’s support, prices subsequently rebounded.
On the one-day chart, the 50-day simple moving average (SMA) is 2.5% above current prices, while the 200-day SMA is 5.4% below.
Since the start of 2022, the 14-day relative strength index (RSI) has been lingering around 50, indicating this week’s negative price actions, but still far from the oversold level.
In the short term, a severe break below the support level might raise the likelihood of hitting the 15,000 psychological level where prices may find support from the 200-day moving average. If prices rebound from present levels and breach the channel’s median line (16,400), bulls may potentially look for an extension toward the resistance in a range between 15,800 and 15,900.
Nasdaq 100 (1-day) candlestick chart and technical analysis – Credit: TradingViewInflation: How Does it Affect Investment Stocks?
Read more: Pressure mounts on Bank of England as inflation hits 5.1%
Markets in this article
Related topics