Nasdaq 100: The downside of rising rates for tech stocks
Matt Weller, CFA, CMT September 28, 2021 7:21 PM
Traders who have spent the last 18 months blindly buying the dip should at least remain open to the idea that rising interest rates are weighing on equities...
If there’s been a major “trade” that’s dominated markets in the post-COVID era, and arguably the entire post-GFC era, it’s been the relentless outperformance of large-cap technology stocks.
While most of these established megacap behemoths, names like Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and Facebook (FB), churn out profits with high margins, traders have more recently shifted their focus toward speculating on “The Next Big Thing” with stocks like Tesla Motors (TSLA), Netflix (NFLX), Paypal (PYPL) and others that have decidedly lower profit margins.
While “lower profit margins” sounds like a negative attribute (and it certainly can be), stock traders have gladly accepted lower profit margins if it meant investing in fast-growing companies under the assumption that these companies could follow “The Amazon Model” of capturing large market shares and eventually raising prices to earn bigger profits years in the future. This theory was largely supported by the price action in these names for most of the past year as both Congress and the Federal Reserve pumped liquidity into the economy to stave off the COVID pandemic.
Now though, with bond yields surging across the board and signs that stimulus may soon start to ebb, traders are questioning whether these fast-growing but less profitable companies will be able to continue their “growth at all costs” philosophy. Finance 101 tells us that the value of any investment is equal to its future cash flows, discounted back to the present at an appropriate discount rate; with the yield on risk-free government bonds rising, these future cash flows are getting discounted more aggressively, especially for firms with minimal current profits who’s value is driven primarily by the expectations of large profits in the distant future.
This brings us to the Nasdaq 100 (US Tech 100), which is more aggressively weighted toward fast-growing technology stocks than the stodgy Dow Jones Industrial Average or broad S&P 500 indices. Contrary to popular perception, the Nasdaq 100 has roughly matched the performance of the Dow Jones Industrial Average over the last year and actually underperformed the S&P 500.
With rates rising yet again today, the Nasdaq 100 is the weakest of the major US indices, losing more than 2.5% as of writing. Crucially, the index is testing key support from the bottom of its 15-month bullish channel and the 100-day EMA in the 14,700 area:
Source: TradingView, StoneX
Bulls could certainly still make a stand here and keep the Nasdaq 100 uptrend alive (indeed, based on past price action, that may be the most likely scenario), but if the index breaks conclusively below its current support level, it could open the door for a deeper retracement toward previous-resistance-turned-support in the 14,050 area next.
As experienced traders know, it’s crucial to strike a balance between respecting past trends and remaining open-minded to new developments. Time will tell if the Nasdaq 100 is at an inflection point, but traders who have spent the last 18 months blindly buying the dip should at least remain open to the idea that rising interest rates are weighing on equities, especially fast-growing technology stocks.
How to trade with FOREX.com
Follow these easy steps to start trading with FOREX.com today:
- Open a Forex.com account, or log-in if you’re already a customer.
- Search for the pair you want to trade in our award-winning platform.
- Choose your position and size, and your stop and limit levels.
- Place the trade.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.