Nasdaq 100 tests key support: What's a bigger threat, Covid or Inflation?

Summary:

Despite the Nasdaq 100 trading just 3% below its all-time high, the market is gripped by fear. But is the virus or inflation really that much of a threat?

Despite the Nasdaq 100 trading just 3% below its all-time high, the market is gripped by fear. But is the virus or inflation really that much of a threat?

The Nasdaq 100 is trading at 14,549, 132 points lower from yesterday’s close, a drop just shy of 1%.

Considering the drastic deterioration in sentiment, you could be forgiven for thinking we are in the midst of a market collapse.

CNN’s Fear and greed sentiment indicator has plunged to 14, indicating investors are ‘extremely fearful’. The last time the gauge registered this low, the market was in a 20% freefall.

Ok, the recent price action has not been pretty, and some caution is warranted. After all, the Nasdaq 100 had enjoyed a pretty smooth 15% ride higher in the last two months. And no one can fault investors for taking some money off the table.

But the level of panic seems odd considering the Volatility index (VIX) is trading at 21.81. Although slightly elevated, this is by no means indicative of an imminent collapse. Traders are clearly not panic-buying put option protection in a manner suggestive of a desperate need for portfolio protection.

Could Covid derail the rally?

There is no debate that the Delta-variant Covid-strain is a problem. It’s highly contagious, seemingly more effective on the young than previous incarnations, and spreading rapidly. And particularly poses a threat to nations with low vaccination rates.

But although covid cases are undoubtedly rising, deaths and hospitalizations are far from keeping pace.

But then again, didn’t the Nasdaq 100 more than double during the first two infection waves that gripped the globe?

If anything, the world is still flush with capital searching for yield. In my mind, the Dow Jones is much more susceptible to a return to lockdown than the tech-heavy Nasdaq. However, many well-respected commentators see a slim chance of this happening.

Investor nervousness is high at present over the Delta variant and how policymakers will deal with it, but this might end up an opportunity to add to the reopening theme again.
JPM’s head Quant ‘the Croatian sensation’ Marko Kolavonic.

A view that was echoed by Pershing Square’s Bill Ackman, who told CNBC’s Andrew Ross Sorkin:

“I think pople are done – I am – with being in a cave. With hiding from the rest of the world”
Adding,
“You’re going to see, in my view, a ‘massive economic boom’.”

Whilst how much of cave a billionaire hedge fund magnate hides in is debatable. The sentiment is not.

So will inflation cause a Nasdaq 100 ‘Tech Wreck’?

Inflation, like Covid, is clearly something that investors should pay close attention to. June’s hot Consumer Price Index (CPI) print which showed a 0.9% MOM increase and a shocking 11% YoY appreciation, cannot be ignored.

However, prices stay high as long as people are prepared to pay them. And there are signs households are starting to baulk at the heady premiums being commanded. Surging inflation has caused a sharp deterioration in consumer sentiment, and this should work its way into inflation in the future, proving Fed Chair Jerome Powell’s transitory theory correct.

Therefore, this may also not pose as big a threat as investors currently fear.

“Be fearful when others are greedy, and greedy when others are fearful.”
Warren Buffet

Tech Index technical analysis

The daily chart shows the Nasdaq 100 has retreated to the safety of a previous resistance level at 14,440, which now offers support.

This trend links three previous all-time highs and therefore is not insignificant.

Additionally, the Relative Strength Indicator has pulled back from last week’s overbought, 75.39 reading and is currently trending lower.

Should the Nasdaq close below the trend line support at 14,440 and extension lower to the 50-day moving average at 14,029 looks likely.

This average lines up perfectly with the 16th of April’s former record high price of 14,050, indicating this will be a serious level of support, which should hold, at least first-time around.

The presence of the 100 DMA at 13,688 and a robust, 13-month uptrend at 13,561 reinforces the robust price support below the market.

This is not the say the market can’t go lower. Of course, it can. However, ‘extremely fearful’ seem’s a little panicky just yet.