The importance of the NASDAQ100, and Levels to Watch

 Long term technical signals suggest the current selloff is a buying opportunity

Coming out of the 2008 Financial Crisis, we saw a shift from value to growth for the first time since the 90s. Growth stocks took the lead and have been the general theme of the current secular bull market that we are in. With a multitude of tech focused microtrends like the internet, mobile, social media, e-commerce, now cloud and soon to be 5G and AI, the tech sector has led growth stocks. 

From a broad market perspective, the NASDAQ100 (NDX), and index of predominantly large cap stocks, has been the most important index to track within the current cycle. It has led the broad market into and out of almost every major correction since this bull market began.  

This pattern has even continued since the quick bear market in March of 2020. From peak to trough, while the S&P 500 saw a 35.40% drawdown, the richly valued NDX only saw a 30.50% drawdown. Since the March 23rd low, we have seen a consistent trend where the NASDAQ100 has led us into each correction and also bottomed before the S&P 500. 

However, since the recent correction began on February 16th, we have seen a meaningful shift from growth to value. Where the DOW is at new highs, the S&P 500 and DOW Transports are down less than 2%, while the NASDAQ100 is still about 7% away from new highs.  

This is a meaningful rotation, which we see as healthy. The microtrends in tech are not over or at the end of their cycle, regardless of stock prices. Also, we want to see as many sectors and stocks participating in this bull market, which is happening. 

Considering the importance of tech’s leadership, as well as the overall weight of tech within the S&P 500, which currently sits at about 24%, without the NASDAQ 100 participating in new highs, I would consider any bottom to be suspect. For this reason, we believe tracking the NASDAQ100 to be crucial right now in order to glean broad market cues. 

I/O Fund has been preparing for a correction since late February. We built up a nice cash position, which we were vocal about with our readers as well as on Twitter (here here here). We also added a series of hedges prior to the selloff, and have recently added them back due to the possibility of a lower low.  As of now, the long-term technical signals, and trend is still up. This suggests the current selloff is a buying opportunity, which we have been taking advantage of. 

NDX: Levels to Watch 

From a technical perspective, there are two scenarios we are tracking:

1. The correction is over. For the green count in the chart above, we finished the final leg in the March 5th correction. If NDX holds 12,600 and we see a breakout above 13,300, the low is likely in for this correction. To confirm this scenario, we need NDX to breakout above 13,300, at which point our small hedge will come off.
2. NDX makes a new low. If NDX breaks 12,600, that would put us in the red count. This count has us in the final leg of the correction, with a potential bottom at 11,715 to 12,050. 
   

Regardless of what path NDX takes, we view this pullback as a buying opportunity and when the correction is complete we expect the uptrend to resume. We have been building key positions as we feel you can’t time the market and you most certainly can’t time a bottom.

There are many tools we use to guide our entries as well as risk management. One is the RSI, which I believe will be a key technical indicator to focus on based on the pattern in the daily chart. The trendline that was acting as support has become strong resistance. NDX needs to break back above the trendline before we can call this correction over. Furthermore, NDX has major support at the blue line. This was the final capitulation point for the March 2020 lows. If NDX reaches that level, we will take it as a strong buy signal. 

Disclaimer: Beth Kindig and the I/O Fund currently owns shares of TSLA. The content in this article is intended to be used for informational purposes only. The author has not received any compensation from any third party or company discussed in this article. The content is the expressed opinions of the author and is intended for educational and research purposes. Any thesis presented is not a guarantee of any particular stock’s future prices, so please factor this risk into your own analysis. It is very important that you do your own analysis before making any investments based on your personal circumstances. The author is not a licensed professional advisor. Please seek counsel form a licensed professional before acting on any analysis expressed in this article, to see if it is appropriate for your personal situation.