Bullish excess in tech stocks props the SP500 up – for how long?

July 16, 2020 12:30

SP500 index tech stocks

Recent developments in tech stocks pushed the Nasdaq100 to fresh all-time highs while the broader market shows clear signs of weakness.

The main driver for the bullish over-performance of tech stocks comes from the "Big 5," with Microsoft, Apple, Amazon, Facebook and Google (Alphabet), which combined have around 20% of the total weight in the S&P500.

But, after recent developments like Amazon pushing above 3,000 USD and bringing the market capitalization to over 1.5 trillion USD and Apple's market capitalization pushing above 1.6 trillion USD, while most US companies lagging bullish momentum, the question arises: what happens if Amazon, Apple and Co. have one down-day?

What if the "Big 5" finally have a down day?

Last week the Nasdaq marked its second positive week in a row, third positive week in four, mainly driven by those "Big 5" which are also all listed in the broader SP500.

If we take out last Thursday's close, we saw Apple, Amazon, Microsoft, Facebook and Google experiencing a positive day while 392 stocks in the SP500 declined.

This massive divergence might not come as such a big surprise with latest developments around new Corona infections in the US, especially in Texas and Florida, states which combined are responsible for over 20% of the annual US GDP, leading to fears rising that another lockdown of the US economy could be imminent.

In addition to this, the Fed balance sheet kept on shrinking over the last week (the fourth weekly decline in a row), dropping below 7 trillion USD, indicating the biggest fall since May 2009.

While it is not just that the Fed reduced its asset purchase, but global central banks are paying down outstanding swaps and thus reducing liquidity which is desperately needed, particularly from Equity markets. This was certainly one of the main drivers for their performance over the last weeks and months and especially the fuel for the push higher in tech stocks.

And with the Citi's US economic surprise index surging to an All Time High and 10-year US yields show no inclination to rise, one can certainly see dark shadows at the horizon and a sharper drop in the "Big 5" and thus the Nasdaq100 seems likely.

But…

How can we trade [NQ100] in this environment?

First of all: formulating a short setup in this current, very bullish environment is risky and very speculative.

While there are clear signs of bullish exhaustion technically, for example with a bearish divergence forming on a daily time-frame in the RSI(14), this should only be viewed as an indication which makes long engagements a little more unattractive from a risk-reward perspective, not necessarily act as a short setup itself.

Still, one technique could be to scale into a trade, start with a small position if the [NQ100] CFD break below 10,500/520 points, placing a stop above 10,785 and aim for a re-test of the region around 10,150/200 points, delivering a risk-reward ratio of minimum 1 to 1.5:

NQ100 daily chart

Source: Admiral Markets MT5 with MT5-SE Add-on [NQ100] CFD daily chart (between April 4, 2019, to July 10, 2020). Accessed: July 10, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of the NQ100 CFD increased by 7.8%, in 2016, it increased by 8.4%, in 2017, it increased by 30.5%, in 2018, it fell by 1.6%, in 2019, it increased by 39.7%, meaning that after five years, it was up by 108.5%.


Discover the world's #1 multi-asset platform

Admiral Markets offers professional traders the ability to trade with a custom, upgraded version of MetaTrader 5, allowing you to experience trading at a significantly higher, more rewarding level. Experience benefits such as the addition of the Market Heat Map, so you can compare various currency pairs to see which ones might be lucrative investments, access real-time trading data, and so much more. Click the banner below to start your FREE download of MT5 Supreme Edition!

Download MetaTrader 5 and begin trading today!

Disclaimer: The given data provides additional information regarding all analysis, estimates, prognosis, forecasts or other similar assessments or information (hereinafter "Analysis") published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:

  1. This is a marketing communication. The analysis is published for informative purposes only and are in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
  2. Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the Analysis.
  3. Each of the Analysis is prepared by an independent analyst (Jens Klatt, Professional Trader and Analyst, hereinafter "Author") based on the Author's personal estimations.
  4. To ensure that the interests of the clients would be protected and objectivity of the Analysis would not be damaged Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
  5. Whilst every reasonable effort is taken to ensure that all sources of the Analysis are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. The presented figures refer that refer to any past performance is not a reliable indicator of future results.
  6. The contents of the Analysis should not be construed as an express or implied promise, guarantee or implication by Admiral Markets that the client shall profit from the strategies therein or that losses in connection therewith may or shall be limited.
  7. Any kind of previous or modeled performance of financial instruments indicated within the Publication should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
  8. The projections included in the Analysis may be subject to additional fees, taxes or other charges, depending on the subject of the Publication. The price list applicable to the services provided by Admiral Markets is publicly available from the website of Admiral Markets.
Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, you should make sure that you understand all the risks.
Avatar-Admirals
Admirals
An all-in-one solution for spending, investing, and managing your money

More than a broker, Admirals is a financial hub, offering a wide range of financial products and services. We make it possible to approach personal finance through an all-in-one solution for investing, spending, and managing money.