The Tech Party is in full swing - however, for how long?
8 February 2024
US Indices on record highs with Nasdaq Composite Index up almost 7% YTD
In this article, I focus on the US market: 3 Buying opportunities last fall
26.5% return since last buying opportunity published on 27 October 2023
A lot of optimism already: Sentiment Index reaching “Extreme Greed” area
Some technical indicators start to look stretched in the short-term
US economy looks strong together with promising earnings season
Several risks: investors (too) focused on interest rates
When is the time to leave the party?
There is almost no day without a news that major indices are reaching new record highs. Especially US stocks had a great start into 2024 with the Tech stocks continuing clearly their last year’s outperformance. The US Technology stocks Index Nasdaq is up almost 7% this year. This, even after the stock market had rather a shaky start during the first 2 weeks.
US Tech stocks Index Nasdaq – Investment Calls: perfect Timing
Let’s have a look at the Nasdaq Composite Index. You can see my investment calls in the chart below starting in October 2022 with my call that there is an opportunity to invest. After a strong rally in the beginning of the year 2022, I recommended to wait with putting more money to work.
Chart Nasdaq Composite Index since 07/2022 - My Investment Calls
Source: TradingView - 07.02.2024
In March 2022, the banking crisis in the US with the collapse of 3 regional financial institutions and the global player Credit Suisse offered a new buying opportunity, highlighted on the day with the market low.
With markets running nicely towards summer and investors becoming more and more greedy, it was time to take some profits. This recommendation published only some days before the Nasdaq reached its high in the summer period. With inflation coming back as a main topic, leading to fears on higher interest rates, risky assets like equities started to decline.
The month August, September and October showed very similar patterns. Each time on the day of the interim market low. I published on ETFMandate Blog (“Sind alle guten Dinge 3?”) my investment call that there is a buying opportunity, especially for the tech sector in the US, last time on 27 October 2023, the day where Nasdaq had its low
Since that day, the Index is up by 26.5% (as of closing on 7 February 2024). After this strong rally, is it now time to take some profit?
Sentiment Index - reaches Level “Sell”
Following the Sentiment Index, the CNN Fear & Greed Index, investors are starting to be extremely greedy. As already highlighted in my articles before, the level can usually be taken as a contrarian indicator. Means, that markets are closer to a correction or at least a period of consolidation with rather sideways moving prices.
CNN Fear & Greed Index on 07.02.2024
Source: CNN Business - 07.02.2024
We can remain on this “extreme greed” level for a while and the rally can still continue. However, it is time to closely follow markets and being ready for taking necessary steps to protect the investments in the portfolio by either taking some profit or implementing a hedging strategy.
Technical Indicators
Markets overall and especially the Nasdaq reached clearly an overbought level with short-term technical indicators point to a consolidation phase. However mid- to long-term trend indicators look promising.
US Economy looks very robust, earnings season promising
The economic indicators suggest that the US economy is demonstrating robustness. Latest figures from labor market are strong. Reported earnings for the fourth quarter surprised more to the upside. However, earnings growth was dominated by the big tech companies. Investors and analysts continue to closely monitor the latest figures and economic indicators.
Plenty of Risk Factors around – nothing to worry about
There is a high number of potential risks which could hit the markets or lead at least to some more volatility:
US election: normally a positive impact on the markets the months before. However, this time could be more volatile towards the election.
Geopolitical risks: conflicts in the Middle East region have the still a probability to escalate. The consequence would be higher oil prices for sure.
The conflict between Russia and Ukraine remains an uncertain factor.New supply chain disruptions: Current situation in Red Sea impacts the normal trading route. Should this situation last longer, supply chains could get stretched again, resulting in higher inflation.
Inflation: Higher energy prices caused by a conflict in Middle East and larger supply chain disruptions would lead to a comeback of an inflation scenario.
Interest Rates: Interest rates are currently (too) much in focus by investors. In a stable environment, some lower rates can be expected. In case of a negative event, this scenario gets redundant. As seen lately, this topic has the biggest potential to cause some market turmoil and volatility as investors are betting on the timing of the first rate cut done by the Fed or ECB.
Central Bank Policy Failure: the hiking cycle for interest rates is done. Now, central banks run the risk of lowering interest rates too late.
Commercial real estate: With interest rates on higher level, refinancing could be tricky for some players. Some news reaching us that first financial institutions reported losses on their commercial real estate loans. Could there be a spill-over effect?
Recession: There are analysts expecting that the US is going to a recession this year. For markets, a soft landing of the US economy is the best-case scenario.
Debts: private, corporate and government debts are on high levels. With the higher interest rates, some companies could struggle in their refinancing, causing more damage and losses for financial institutions and the overall economy.
Economic War: Currently not so much covered by the media. However ongoing potential of reaching an escalation level.
Cyber Attacks: hard to predict, however, there is always a probability of such an event on a larger scale.
… even more risks can be around the corner.
As you can see, a bunch of risks could hit markets each one with its own probability to materialize. However, investors are already aware of this number of risks.
Nevertheless, when such an event occurs, markets would react with a short-term sell-off. From today’s point of view, none of these risks has the potential for a total market collapse though. Of course, this depends always on the reaction of the investors, as we experience an over-reaction in some cases.
My Portfolio – stay at the party and ride the wave
Somehow it is much more difficult to time the exact exit compared the entry point. Looking at the Nasdaq, the last 5 calls to buy I made exact on the right day where the index had its interim low. Usually, it is the day, where everyone wants to run out the door at the same time.
To participate, I implemented this call via an ETF on the Nasdaq Index. As I was very much convinced about the potential up-move, I even bought a leveraged ETF this time. Leveraged ETFs, I can only recommend for risk aware investors knowing about the product characteristics.
On the upside, the latest moves let me assume that the upswing could very soon run a bit out of steam in the short-term. It seems like the last ones try to join the party jumping on the express train in trying to catch the latest part of this short-term uptrend. How long there are market participants willing to take this risk and trying to make these efforts, this is much less predictable and can last longer.
At this stage, it definitely could make sense to wait a bit on the sideline, as there is a bigger risk that such a trade could get painful and turns into a loss right after its execution. There will be better opportunities to invest with a higher probability to earn money.
So far, I still stay at the party and continue in riding the wave of this tech rally supported by investors behavior and the outlook of falling interest rates. However, I am ready to take measures for some profit taking in the short run. Furthermore, with volatility currently on low levels, I elaborate a scenario to hedge part of the portfolio in case of a negative event.