Where now for the Nasdaq 100
We look at the Nasdaq 100, one of 2020’s strongest performers, and examine whether the rally can continue.
Can the Nasdaq 100 keep rallying?
Perhaps one of the big surprises of markets so far in 2020 has been the resilience of tech stocks. Despite economic lockdown and huge disruption to normal life, and an enormous hit to activity for both economies and companies, major tech stocks have continued to rise, with many hitting new highs.
The Nasdaq 100, the index of the 100 largest tech companies in the US, has also hit new record highs, and so far shows no sign of reversing even in the short-term. This has brought comparisons with 1999 and the dot-com bubble. But a look at the fundamentals shows that, aside from the huge increase in price, there is little that resembles the Nasdaq from 20 years ago.
In 1999, the index’s price-to-earnings ratio was 73. Now it is 31, a much lower level and a cheaper valuation. 20 years ago the index’s overall level of sales was around $120 million, and now this has reached $1.5 billion, an increase of over ten times. Around 6 times as many companies in the index now pay dividends, and the overall free cash flow of the index is much higher.
Nasdaq 100 breadth still strong
The rebound in the index is also based on strong index breadth. The Nasdaq advance-decline line, a measure of the strength or weakness of an index is now close to the previous peaks in late 2018 and early 2019, with more stocks rising than falling.
On a daily timeframe, the reading has recently broken higher, and remains firmly above its rising 13-day EMA and 50-day SMA, both bullish signs as well.
In addition, the percentage of Nasdaq 100 stocks above their 50-day SMA is solidly above 60%, having rebounded from single digit levels in March. While this reading has declined since June, it remains above 50% and thus points towards more upside in the near-term.
Finally, the percentage of index members at 100-day highs has continued to climb, and after a drop in the second half of July it has resumed its march higher. The July peak was around 15%, well below the high levels seen in January and February, suggesting the index could continue to move higher.
Nasdaq 100: technical analysis
The index has seen a quiet, but steady rally since the middle of April. This grind higher is nothing like the volatility of February, March and early April, when a huge drop was followed up by a substantial rally. Despite all expectations to the contrary, the index continues to rally, forming higher highs and higher lows. Short-term pullbacks still remain likely buying opportunities. Both the trend channel from mid-April and the 21-day EMA (purple line) have been very good guides as to the direction of the trend over the past few months, and both remain intact.
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