What goes up must come down. The Nasdaq-100 Index is due for a drop, according to Jonathan Krinsky, managing director of Bay Crest Partners.
The Nasdaq-100 is composed of the 100 largest of the 3000 stocks trading on the Nasdaq exchange. Over the past three months, the Nasdaq-100 has gained 16% to 9517.86 at market close on Tuesday.
The Nasdaq-100 has a long history of outperformance, but after gains this large, the index is often set up for a fall. “Betting against this index over the medium- and long-term is usually a losing proposition,” Krinsky wrote. “There are certain times, however, when the risk-reward on a tactical (2 to 8 week) basis appears quite poor.”
Krinsky thinks that time is now. He notes that the Nasdaq-100 has not had a 3% drawdown in 82 days. Furthermore, it is currently 17% above its 200-day moving average, the mean of the closing prices for the past 200 days, after closing above 16% on January 23rd.
Krinsky believes this is an important trading indicator, signaling a fall from the peak to the trough in the near future.
When modeling data, Krinsky took note of the seven times since 2000 that the Nasdaq-100 has reached at least 16% above its 200-day moving average for the first time in a month and was within 3% of a 52-week high. He omitted when this occurred in May 2003 and September 2009 because the market was emerging from recessions. All of the other five times led to two-month negative returns, with an average drop of 4.6% and a median decline of 3.4%.
Based on these precedents, Krinsky foresees an upcoming dip.
Another key indication that a downturn could be coming is the PHLX Semiconductor Sector (SOX) index, which has served as a leading indicator for the Nasdaq-100 for both rises and dips, Krinsky wrote. It has “underperformed” the Nasdaq-100 more than 7% since late December, leading Krinsky to highlight it as a potential alarm bell.
However, Krinsky acknowledges there could be some exceptions to the precedents. “For instance, from January 1995 through March 2000, the NDX was greater than 16% above its 200-day moving average on 47% of all trading days,” he wrote. A key difference then was the underlying volatility, as he pointed out that 43 days was the longest streak without a 3% drawdown at closing from 1990 to 2000.
The growth in the Nasdaq-100 has been bolstered by certain companies that have been doing particularly well in recent months, including those in the technology industry. “Technology is really the only sector that is outperforming the S&P 500 with positive momentum,” Krinsky wrote.
Tesla (TSLA) stock is up over 120% over the past three months. Amazon’s (AMZN) market value hit over $1 trillion in January after reporting better results than expected. Apple (APPL) posted $91.8 billion in revenue this quarter, surpassing analyst estimates and increasing 9% from the prior year.
Similarly, Microsoft (MFST) stock rose in January after posting returns higher than Wall Street anticipated with earnings per share of $1.51, versus the expected value of $1.32, and revenues of $36.9 billion, versus the expected value of $35.7 billion.
However, Krinsky warns Microsoft has a risk of “retracement in the coming weeks.” He wrote that this is the highest that Microsoft stock has risen above its 200-day moving average since 1999, excluding a 2009 recovery from a bear market.
Movements were minimal on Tuesday. At market close, the Nasdaq-100 was up 0.01% to 9517.86, while the S&P 500 was up 0.17% to 3357.75.
