Massive Nasdaq Rally Springs From Deepest Hole in Three Decades

A day after the Nasdaq 100 fell more than 10% from a record into a technical correction, the tech-heavy benchmark made a resounding comeback.

With roughly a quarter of the index’s members surging more than 5%, the Nasdaq 100 ended Tuesday up 4% for the best rally since November. ARK Innovation ETF, star manager Cathie Wood’s flagship fund that has suffered losses of at least 10% in each of the last two weeks, jumped the most on record, adding 10%. Shares of Tesla Inc., which had fallen more than 30% from January levels, soared 20%. Stay-at-home market darlings Peloton Interactive Inc. and DocuSign Inc. each rose more than 10%.

Such is the aftermath of a technology selloff that, by one measure, reached the most oversold level in three decades. Data show droves of investors have been rushing to buy the recent dip, a strategy that -- at least on Tuesday -- was looking smart.

“This whole idea of buying on the dip has been so ingrained in people’s psychology that you are going to see bounce backs after multi-day sell-offs,” said Marc Odo, client portfolio manager at Swan Global Investments. “That’s inevitable, unless there is some big event on the news where everything has changed.”

Massive Nasdaq Rally Springs From Deepest Hole in Three Decades

In recent weeks, a rise in bond yields sparked a selloff in high growth stocks, with more than $1.5 trillion wiped off the Nasdaq 100 in less than a month. Expecting higher economic growth and possible inflation, investors poured into industries perceived to benefit -- including banks and energy -- while using big tech as a source of funds.

The equity market rotation was swift. Frank Cappelleri, Instinet LLC’s senior equity trader and market technician, noted that on Monday the 14-day relative strength index of a ratio of Nasdaq 100 price performance versus the S&P 500 Index hit the most depressed level since 1990.

Other measures also pointed to an oversold market. At Monday’s close, the Nasdaq 100 traded 6% below its average over the past 50 days, the biggest discount since last April. At the same time, its 14-day RSI, a measure of the degree to which gains and losses outpace each other, fell to the lowest level in a year to near 30, a threshold that’s usually seen as a sign that stocks are poised to rebound.

Another catalyst behind tech’s rally may have come from the bond market, where rising yields that had put pressure on richly-valued growth stocks are showing signs of easing. That’s not unexpected. Strategists from Citigroup Inc. and UBS Group AG warned earlier this month that the yield-fueled equity rotation had embedded rates way higher than their actual levels, setting the stage for a potential reversal should yields stabilize or pull back. Rates on 10-year Treasuries hit a 12-month high of 1.62% last Friday and have since retreated.

“Wall Street is a one-way street right now and it is going whichever way the Treasury market takes it,” said Edward Moya, senior market analyst at Oanda Corp. “The move in tech stocks coincides with the rally in Treasuries, so many traders will be skeptical that this rebound will stick.”

Dip buyers in tech stocks got a day of vindication as the Nasdaq 100 rallied Tuesday. As the benchmark fell into a correction over the past few weeks, there was no shortage of bottom fishing along the way, at least going by Bank of America’s client flows. Over the last four weeks, everyone from hedge funds to individual investors were big buyers, with average tech inflows reaching a record high, the bank’s data showed.

Massive Nasdaq Rally Springs From Deepest Hole in Three Decades

While strategists from RBC Capital Markets and Morgan Stanley have warned that the tech rout may not be over, Tuesday’s action gave hope to tech faithful that it’s not a lost cause. To Deepak Puri, chief investment officer for the Americas at Deutsche Bank Wealth Management, technology and sustainability are two of the cornerstones for most medium- and long-term investing theses, and a 10% pullback isn’t likely to change that.

“It had to happen. The Nasdaq, the last time I checked, it was up 75% over the last three years,” he said. “Correction territory should not be thought of as the start of some massive recalibration. Markets go up and they go down.”

Still, to Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, the latest tech carnage hasn’t fixed the valuation problem. At 26.2 times forward earnings, software and internet stocks are not only trading at a 43% premium relative to their own history but also remain elevated versus the S&P 500, the firm’s data show. Moreover, the firm’s model on fund positioning indicates that sentiment has yet to reach levels that typically signal a market bottom.

At the same time, large rallies -- such as Tuesday’s -- often happen in the middle of deep selloffs. Take last March, for example, when the Nasdaq 100 staged five rallies of more than 4% before bottoming on March 20.

“The big tech unwind may be at least halfway done,” Calvasina wrote in a note, adding, but it “isn’t finished.”

©2021 Bloomberg L.P.

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