The NASDAQ Implosion Continues: How To Think About It?
The Nasdaq is rocketing lower. April was terrible for technology stocks' performance. Be very, very humble about thinking you can catch this falling knife.
Be even more cautious about buying some of the companies that are down 70%+ from their all time highs.
Here is why.
We don't spend a lot of time on technical analysis or even technical-anything in this newsletter because we are neither experts nor big believers.
But as the Nasdaq continued to decline AND underperform this past week it caught our eye that it was the fact that the tech heavy Nasdaq index was breaking beneath its 100 week moving average.
Over the past decade, Nasdaq has traded below its 100 week moving average three times:
Q1 2016 economic growth scare,
Q4 2018 sell off driven by fears of higher rates
And the Q1/2 Covid shock.
For the curious, this average is a technical indicator that is obviously an average of the index's price over the past 100 weeks or roughly 2 years. It could be any other number and frequently is the 50 or 200 week (or day) moving average.
Anyway, here is the graph:
As you can see, in all the previous cases, the market bottomed soon after breaching the 100 week moving average.
We will have to see if this time is any different but could a major bounce be imminent?
Well, in classic fashion, after the darkest of starts to the week, came the brightest of reversals - largely driven by some very strong positive earnings from some of the biggest tech companies:
After having been down 4%+ on Tuesday alone, the index was positive for the week by Thursday's close.
But then, after disappointing Amazon earnings, the Nasdaq cratered another ~4.2% on Friday to leave it down over 13% for the month and recording the worst monthly performance since 2008. Even by the wild standards of 2022, this is quite a 1-2-3 combo:
Where does this leave us?
Hard to say! Aside from being uber-cautious, it might help to take the long view:
From a fundamental valuation standpoint, examining the Nasdaq's Composite Price to Earnings ratio summarizes the situation well.
(the price-to-earnings ratio is a measure for valuing a company by comparing its share price to its earnings per share)
The Nasdaq P/E ratio has now fallen over 30%+ from its peak which you might think would start to make it pretty attractive from a valuation stand point (cheap or expensive vs earnings)
BUT keep in mind it still keeps the index more expensive by this metric than any time between 2007 and late 2019:
This is the big takeaway:
Yes, things have declined a lot but only after a massive run up and these names or the broader index can hardly be called "cheap" by most metrics.
So, in conclusion, the best we can say is that we are in a period of high market volatility and possibly the start of a very different market regime. This could lead to very sorts of businesses and products being valued.
Taking this into account, please be exceptionally careful about buying any dips and recognize that what has worked over the last decade may no longer en vogue.
Here is a last graph that neatly encapsulates just how much things have changed. Here is the famous ARK Innovation ETF run by the famous Cathie Wood.
After dramatically outperforming the S&P 500 for years the ARKK ETF is now close to underperforming the big company index. It was over 500% as recently as February - of this year!
And this is before fees (which, in the case of ARKK are hefty!) of course.....
Many of this fund's companies are down by 60-80% this year, or worse. Wood's biggest position, Teladoc, declined over 46% just on poor earnings on Thursday. 46%!!
Put it all together and Nasdaq-100 companies have lost nearly 2 trillion in market cap this month. That is simply terrible and suggests great, great humility about touching this index, these sectors or growth companies more generally.
Here is a great Twitter thread on this theme by a long time tech investor and thinker, Bill Gurley:
Previously, we have argued that the current situation can't change unless we get a real shift in inflation expectations - which can give the Fed more room to maneuver - or a dramatic shift in growth expectations.
The news on the latter isn't great either. For that we need to turn elsewhere.
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