The Nasdaq-100 and tech stocks could decide the market’s fate into 2017, despite well-publicized rallies in small-caps, banks, and transports. Tech’s widely-held names including Apple Inc. (AAPL), Facebook Inc. (FB) and Microsoft Corp. (MSFT) have a strong influence on broad retail sentiment, which is needed for the S&P 500 and Russell-2000 to escape gravity from long-term trading ranges and enter sustained uptrends.
Tech stocks which have underperformed since the presidential election triggered a rotation into assets that are expected to benefit from higher inflation. Market history tells us that tech-led rallies tend to float all boats while blue chip leadership often fizzles out because it fails to excite mom and pop investors. As a result, market players will be watching Nasdaq-100 price action, waiting for a breakout that sustains other market groups or a breakdown that ends the recent buying wave.
The Russell-2000 adds complexity to this binary setup, recently posting an all-time high above $1300 in reaction to U.S. dollar strength that favors domestic assets. Small-cap strength may also point to greater speculative fervor, but those signals require retail cash to come off the sidelines in response to higher prices. That means watching fund flows in coming weeks for clear evidence that Main Street is buying into the latest uptick.
QQQ Long-term Chart (1999-2016)
The Powershares QQQ Trust (QQQ), equity proxy for the Nasdaq-100 futures contract, topped out in March 2000 just above $120 at the height of the Dot-com bubble and crashed into 2002, losing more than 80% of its value. It entered a new uptrend in the fourth quarter of that year and continued to gain ground into the 2007 bull market high at $55.07. The rally retraced just 35% of the prior decline, ahead of a major selling wave, led by the collapsing real estate bubble.
The fund posted a higher low in March 2009 and resumed its upward trajectory, reaching the 2007 high at the end of 2010. It took another 16 months to clear that barrier and enter a long period of exceptionally strong returns, driven by the Federal Reserve’s quantitative easing polices. Momentum faded in the middle of 2015, yielding a correction that posted a series of higher lows in August 2016 when it lifted to a bull market high within two points of the 2000 peak.
QQQ Short-term Chart (2015-2016)
Price action since 2015 has generated a rising highs trendline (upper red line) that’s been tested three times since August 2016, with aggressive sellers taking control after each buying impulse. Those reversals have reinforced a 16-month rising wedge pattern that’s pointed right at major resistance centered at the March 2000 high. Ominously, wedges into resistance often precede major declines that expand rapidly to the downside.
That turnaround could weigh heavily on the post-election rally and drop current market leadership back into their trading ranges in failed breakouts. Conversely, a Nasdaq-100 surge to new rally highs will confirm bullish action in the S&P 500, Russell-2000, and other market groups, setting the stage for a momentum rally that could post double-digit percentage gains in 2017.
The Nasdaq-100 trading range since July should be watched for buying or selling signals that predict broader price action. Specifically, a breakout above $121 will clear wedge resistance and the 16-year high (blue line) while a decline through $113 generates a test at wedge support (lower red line), which is unlikely to hold. These levels roughly equate with 5000 and 4500 on the futures contract and cash index.
The Bottom Line
The Russell-2000 has reached an all-time high while the S&P 500 is testing August’s bull market high. The Nasdaq-100 is lagging badly, signaling a bearish divergence, with tech stock weakness having the power to undermine blue chip and small-cap advances. For this reason, observant market players will be watching clearly defined support and resistance levels on the tech-heavy index, withholding a fair share of capital until it joins other benchmarks at higher prices.
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