By Giles Coghlan, Chief Currency Analyst at HYCM
Technology stocks have really been a surprise winner during COVID-19. The accelerated move to digitalisation has really benefited the tech-led NASDAQ. Few could have predicted at the start of the pandemic that the NASDAQ would make fresh and yet it has. That’s trading – full of the unexpected. Of course, in hindsight it makes sense, the world forced to stay at home and watch Netflix, buy via Amazon, and watch google and Facebook ads as they fill the time. However, has this rally now run its course?
Has the NASDAQ now topped?
I came across an interesting piece on Bloomberg making a case for a NASDAQ top. The rationale is based around the ratio between the NASDAQ 100 and the Russel 2000. The ratio between the two indexes is currently very high. In fact, it is at its highest since the last tech bubble in 2000. It is, at the time of writing, approaching a three standard deviation move from its mean quarterly average since 1985. Take a look at the chart below:
What to do about this?
The ability to call ‘tops’ is very tricky. In fact, the market can remain irrational far longer than you can remain solvent. Look at the recent rise in Tesla recently. Some bubbles just don’t make sense. At one time tulip bulbs could sell for around 10 years of wages. Now you can get a dozen or so for a relatively small amount of cash.
Wait for signs of technical reversals.
However, looking for some key reversal patterns at these levels on the Nasdaq would make sense. Patterns like a Head and Shoulders pattern and double/triple tops could provide an early heads up and, more importantly, a way to quantify your risk.