VTI - Here Is Why The Nasdaq Advance Has Halted

2023-09-18 10:37:47 ET

Summary

• The Nasdaq has seen significant growth since January, favoring large to mega-cap growth stocks.
• Rising interest rates in 2022 caused multiples to contract, impacting longer-duration stocks and bonds.
• The recent rise in oil prices has caused a standstill in the growth of the Nasdaq, but it is expected to level off soon.

Back on January 6 ^th of this year, we published an article for our followers that made a very bold and simple statement: “The Nasdaq Has Bottomed.” The Nasdaq is up 20.4% since that article came out and we have had a very good year with two of our three growth portfolios. This has been a year that has favored a narrow list of large to mega-cap growth stocks.

We hold around twenty stocks in each of our portfolios when they are fully invested. Our goal is to find the very best that we can find at that point in time. No room for any slouches. This is precious real estate that these stocks occupy. I currently have 5,883 stocks, mutual funds, and ETFs in my database. Believe me, there is a lot of mediocrity in the market.

In addition to this, every year is different. The stocks that are leading the market this year were some of the worst performers last year. Consider that Nvidia ( NVDA ) was down 50.3% last year and it is up 200.4% so far this year. Microsoft (MSFT) was down 28.7% last year, but it is up 37.7% this year. And get this: Tesla ( TSLA ) was down 88% last year and is up 122.8% this year!

I think you get the idea, 2023 is an entirely different year from 2022. But why the stark difference between the two years?

The answer is simple: the rising interest rates of 2022 by the Fed caused multiples (P/E ratios) to contract. The higher the multiple, the bigger the contraction. In addition to this, longer-duration stocks (think Cathie Wood’s ARKK) and longer-duration bonds fare much worse than shorter-duration ones in a rising interest rate environment.

Consider that Wood’s ARKK fund was down 67% during 2022 and Silicon Valley Bank had to be liquidated in 2023 because of the big loss in their long-duration U.S. Treasuries portfolio. One would think that they would have known better to plow into long-duration treasuries during a rising interest rate environment.

Lesson learned?

Now then, why were we so bold to proclaim a Nasdaq Bottom in early January?

If you go back and read our “ The Nasdaq Has Bottomed” article, we made several key points. One of them was that from a technical point of view, the Nasdaq was tracing out a bottom and heading for a golden cross (a crossover of the 50- and 200-day moving averages.)

This was because professional investors were looking ahead beyond the draconian interest rates by the Fed of 2022 and were now moving back into growth stocks. Not only was this activity showing up in the indexes, but also in many of the key stocks that compose those indexes.

In fact, a golden cross had already occurred on the DJIA back in late December, and it seemed that it was just a matter of time before both the S&P 500 (SP500) and the Nasdaq (COMP.IND) would follow.

Look at the sudden reversal that took place in Nvidia in early October of 2022 and then the pullback in early January. This became a launching pad for the stock in early 2023.

Look at the beautiful double-bottom that Microsoft formed during late last year and early this year. It broke out to the upside after its stunning ChatGPT news. It was now “game-on” for the large/mega-cap growth stocks.

Between our Premier Growth and Ultra Growth portfolios, we have been fortunate to own most of these outperformers so far in 2023. When the switch flips to growth in the market, names like Apple (AAPL), Microsoft, Meta Platforms (META), Alphabet (GOOGL), Tesla ((TSLA)), Netflix (NFLX), etc. are the low-hanging fruit that the big institutions run too.

Keep in mind, that these were the names that they ran from in 2022 due to an extreme rising interest rate environment.

Our small/micro-cap growth fund has struggled along with the S&P 600 small-cap index so far this year, however. This index is up a miniscule 2.24% YTD while the large and mega-cap indexes are up anywhere between 20-30% so far this year. That is because the large institutions continue to plow into the large, liquid names and in addition to this, inflation has stuck around longer than expected. Inflation hits small-caps hard.

Until further notice, we continue to favor large-cap/mega-cap growth stocks, but small-caps will eventually come around at some point, however. There is currently a lot of good value building up amongst a quality group of tiny titans, but for now, they are being shunned by the market for the most part.

So, the coast was clear to go back into the Nasdaq on January 3 ^rd of this year. This is now September 16 ^th, and the Nasdaq is up considerably since then. The Nasdaq got roughed up considerably on Friday. Is this the beginning of the end for the large-cap growth stocks that dominate the Nasdaq?

Let’s first look at a current chart of the Nasdaq: I have looked at about 1,000 charts every day during my 23-plus years as a professional money manager. My wife says that when she looks into my eyes, she sees moving averages. I try to turn them off when the market closes, but you know how it is for a technician.

As you can see from the chart below, the golden cross for the Nasdaq is still in place; the index has gone a long way since January, and it has leveled off into a #3 sideways trend since mid-June. It had a steep correction of about 10% in August (ARKK was down 21% during that same period of time) and it was coming back until it recently came to a standstill.

This recent standstill has been caused by the sudden rise in oil prices. It was not that long ago that Saudi Arabia announced a cut in oil production. This is now showing up in the supply side of the equation. The current administration fought the runaway rise in oil in 2022 by releasing oil from our strategic reserves. They do not have that option this time around.

They could free up domestic land for drilling, but I do not see that happening. With peak driving season coming to an end and technical resistance ahead for oil prices, however, oil should level off somewhere in the low $90 range.

This sudden rise in oil has also caused interest rates to go back up. They too are now hitting resistance, however. This rise in rates has caused the multiples on growth stocks to contract and the rise in growth stocks to come to a standstill.

The rise in oil prices is bad for the economy and bad for inflation. If it continues, it would make the prospects for a soft landing doubtful. We think that oil prices are about ready to level off and interest rates will begin dropping back soon. With the S&P 500 now trading at a more reasonable multiple of 18.8X vs. a high of 23X at the beginning of 2022 we see the Nasdaq challenging its all-time high of 16,212 by mid-2024.

Stay tuned, however, as a lot can change between now and then. We will keep you posted on a weekly basis.

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