A review of the Nasdaq-100
Eoin Treacy's view Economic results continue to disappoint, with the UK and USA reporting contracting
industrial output today and the EU limping from one crisis to another. Conditions
such as these lend credibility to those expecting a deflationary outcome and
bullish expectations have declined.
Central banks have responded by committing themselves to avoiding such an outcome. Their answer has been to lower the cost of capital and increase supply in an effort to stoke investor demand. This has contributed to increased volatility as market participants have become reliant on fresh bouts of liquidity provision to boost returns from risk assets.
As global growth expectations are pared back, another round of quantitative easing becomes more rather than less likely and investors are beginning to position themselves for such an outcome. So far this week, we have reviewed ASEAN stock markets and consumer related shares. Today, I thought it would be instructive to look at the constituents of the Nasdaq-100, not least because it remains a leader among “developed” stock markets.
After conducting a Chart Library High/Low Filter of the constituents of the Index, the outperformance of the cutting edge healthcare sector remains apparent. I first remarked on the rotation from cloud computing into healthcare stocks in Comment of the Day on January 18th. Since then, the commonality in healthcare has until recently been quite strong.
Within the technology sector, cloud computing has been mostly rangebound over the last year and its commonality has deteriorated. The result is that it is more important than ever to judge each share on its individual merits. Amazon, EMC Corp, Citrix Systems, Oracle and Autodesk have all been mostly rangebound for more than a year but have held progressions of higher reaction lows since October. Provided these sequences hold, the benefit of the doubt can continue to be given to potential for additional higher to lateral ranging. Google is testing the upper side of its medium-term range.
Intel, IBM and Teradata had become temporarily overextended by the end of the first quarter. They both pulled back and found support in the region of their respective 200-day MAs over the last couple of weeks. Sustained moves below their respective MAs would be required to question medium-term scope for additional upside. Comcast is one of the few technology oriented companies to have hit a new high in the last couple of weeks.
Shares such as Cognizant Technologies, Check Point Software, BMC Software and Salesforce.com have experienced greatly technical deterioration and will need to do more to restore investor confidence.
Altera, Juniper Networks and Cisco Systems have returned to areas of previous support and exhibit signs that demand is returning to dominance. Potential for additional bounces will remain credible provided they hold above their recent lows.
In the healthcare sector Alexion Pharmaceutical, Biogen and Amgen continue to hit new all time highs but the first clear downward dynamics are likely to signal the onset of reversions towards their respective 200-day MAs,
Following relatively lengthy periods of consolidation Gilead Sciences, Express Scripts and Stericycle have returned to test their respective peaks. Sustained moves below their 200-day MAs would be required to question potential for additional upside. Patterson Cos is also testing the upper side of its multi-year range. Cerner Group has returned to test the region of the 200-day MA where it will need to find support if the medium-term uptrend is to remain consistent. Mylan found support in the region of its MA from mid July and a sustained move below it would be required to check potential for some additional upside.
On June 28th I highlighted a number of highflying shares that looked susceptible to mean reversion. Monster Beverage has pulled back and appears to have found at least near-term support in the region of the 200-day MA. Starbucks ranged mostly above $50 and the MA until 2 weeks ago but dropped abruptly last week and extended the decline this week. It will need to sustain a move above $50 to reassert demand dominance.
Dollar Tree Stores briefly moved to a new high but has lost momentum and continues to pull back towards the mean and its progression of higher reaction lows.
Volatility has increased for Ross Stores and it remains susceptible to an additional pullback. TJ Maxx has had a similar move and has been less volatile but remains susceptible to mean reversion.
Whole Food Markets bounced emphatically from the region of the 200-day MA last week but some additional consolidation is probably warranted before a resumption of the medium-term uptrend can be sustained. Costco continues to rally impressively but is becoming increasingly susceptible to mean reversion.
O'Reilly Automotive pulled back abruptly from its April peak and has at least paused in the region of the MA. It will need to break the short-term progression of lower rally highs to signal a return of demand in the $80 area. Autozone has so far had a relatively tight consolidation and the benefit of the doubt can continue to be given to the medium-term upside provided it holds above the 200-day MA.
Bed Bath & Beyond dropped abruptly in late June and has been ranging below the MA since. It needs to hold above $55.50 if the medium-term upside is to continue to be given the benefit of the doubt.
Expedia is now even more overextended and susceptible to a reversion to the mean.
In conclusion, while the Nasdaq continues to hold a position of outperformance relative to most other global induces, there has been considerable divergence in the performance of various sectors within it. Broadening is a characteristic shared by a number of the above shares and is identified by a lengthier ranging phase. If demand is to remain dominant over the medium-term, progressions of higher reaction lows will need to remain intact, As with any instrument, when prices become widely divergent from an ascending 200-day MA, the likelihood of a reversion towards the mean greatly increases. (Also see David's comments on this subject yesterday).