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Seemingly Unstoppable Rally for U.S. Technology Stocks May Be Coming to an End

4.6

Charles M. Hall

October 03, 2023

The remarkable rally for U.S. technology stocks could be reaching a turning point amid persistent weakness in market breadth, despite the ongoing surge in Treasury yields and the U.S. dollar. Jonathan Krinsky, the technical strategist at BTIG, believes that the current streak for technology stocks, particularly the Nasdaq 100 (NDX), is highly unusual compared to previous years.

Krinsky notes that the Nasdaq 100 has not experienced a daily percentage decline of 2.5% or worse in 198 trading days. The last time the NDX did not have a 2.5% down day or worse was back in 2013. However, what sets this year apart is the narrow market breadth that still persists.

To gain a broader perspective on market breadth, Krinsky analyzes the Nasdaq Composite (COMP). He points out that in 2013, over 70% of stocks on the Nasdaq Composite were above their 200-day moving average (DMA), with only a few days when it dipped below 65%. In contrast, this year, the 200-DMA for the Nasdaq Composite has consistently remained below 50%, with only a brief spike above in February.

Krinsky concludes that the lack of a negative 2.5% day for the Nasdaq Composite stands out due to less than half of the stocks currently being above their 200-DMA. This suggests that a low volatility environment, similar to what was experienced in 2013, is not expected.

Overall, while U.S. technology stocks have been on an impressive run, signs of market breadth weakness raise concerns about the sustainability of this rally.

The Nasdaq 100's Winning Streak Under Threat

The Nasdaq 100's impressive winning streak may be in jeopardy as weak market breadth, alongside soaring Treasury yields and a strengthening U.S. dollar, raise concerns about a potential downturn. According to experts, a significant drop of at least 2.5% is expected in the near future.

Treasury Yields Continue to Rise

Treasury yields continued their ascent on Tuesday, with the 30-year yield BX:TMUBMUSD30Y surpassing 4.9%, reaching its highest level in 16 years. Similarly, the yield on the 10-year Treasury BX:TMUBMUSD10Y rose by 9 basis points to 4.766%. These figures indicate a market expectation that the Federal Reserve will aim to maintain higher interest rates for an extended period, in order to counteract inflation.

U.S. Dollar Sees a Surge

On Tuesday morning, the U.S. dollar reached its most robust level in the past year, with the ICE U.S. Dollar Index DXY peaking at 107.35. This marks the highest intraday level since November 22, according to FactSet data.

Stock Market Takes a Hit

The stock market experienced a significant downturn on Tuesday, with the Dow Jones Industrial Average DJIA plummeting by nearly 350 points or 1%, to reach 33,085. Meanwhile, the S&P 500 SPX and the Nasdaq Composite dropped by 1.2% and 1.6% respectively. The Nasdaq 100 index also suffered, falling by 1.5% to reach 14,613 according to FactSet data.