This Week's Nasdaq Sell Off Explained

Is Nasdaq selloff just a natural correction or something more concerning?

Charts (1)

To say that the Nasdaq has been volatile would be an understatement.
The Nasdaq is already trading -7% lower so far this month, at the time of writing although this is likely to change as the US markets open. Whilst this sounds like a huge move, and it is a huge move, it is also worth baring in mind that the tech heavy Nasdaq has soared over 38% since April and rallied 9% just last month.

What’s leading the sell off?
After surging across the coronavirus pandemic, thanks mainly to big moves in the FAANGs (Facebook, Apple, Amazon, Netflix and Google parent Alphabet), the Nasdaq has been witness to some serious swings over the past two weeks which is making investors nervous. The Nasdaq has been led lower by these very same stocks, which dominate in the Nasdaq index.

Natural correction or something more sinister?
The big question is whether this pull back we are seeing is just a natural correction, a pause in a very significant run up, or whether it is a sign of more losses to come? 
According to a report in MarketWatch, the first 5 trading days in September should be closely monitored. Dow Jones Market Data reveals that without exception, since 1974, in every instance that the Nasdaq has fallen over 4% in the initial 5 days of trading in September, losses continue across the month. Although its also worth pointing out that this year has been far from business as usual.

On the other hand, these very big successful tech firms have seen a boost from the work from home climate which has accelerated our dependence on tech. Expectations for revenues and profits going forward soared, as did what people were prepared to pay for these stocks, which got out of hand.

It is still too early to tell whether this is just a natural correction or not. The rise in the Nasdaq on Wednesday boosted optimism that the rout could be over. However, Thursday saw the sell off re-ignite, causing concern and today the Nasdaq undecided. Its often prudent to wait for two days of bounce before considering a buy position in these conditions. 
What is for sure is that tech stocks overheated and got ahead of themselves. But even with the correction that we saw this month, it is still only a fifth of the speedy run up in the stocks. Broadly speaking when things shoot for the moon they often come back down to earth.

Yet given the fact that the current work from home environment is supportive of these stocks, many investment managers, including those at Goldman Sachs believe this is just a natural pullback with some even predicting that big name tech stock could still end the year above where they are now.

Nasdaq

The Nasdaq has ha a tremendous run run up from mid March low of 6637 to 12467 all time high. Since then the sell off has seen a breakthrough 50 SMA at current levels of 11100. It still trades above its 100 sma (10350) and 200 sma (9745). The Nasdaq price is not in oversold territory on the RSI there some more downside is possible.


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