Bulls continued their modest retreat on Friday as traders sold big technology shares ahead of an important rebalancing for the Nasdaq 100, states Jon Markman, editor of Strategic Advantage.
The benchmark closed at 15,426, a loss of 0.3%. For the week the NDX lost 0.9%. Nasdaq executives announced July seventh that its 100 index would undergo a special rebalance on July 24 to address overconcentration. The Nasdaq 100 is a modified market capitalization-weighted index, with normal rebalances conducted each December. The rebalance on Monday should increase the index weight of Broadcom (AVGO) and several other large-capitalization technology companies. Analysts at Goldman Sachs expect the weightings to decrease for Alphabet (GOOGL), Amazon.com (AMZN), and Nvidia (NVDA).
Bears shouldn’t get too excited, though. The machinations at the Nasdaq will force passive index funds that track the benchmark to buy more shares of companies outside of the biggest seven. Professional discretionary money managers are likely to follow. This broadening of investments will be another blow to the bearish narrative that too few companies are participating in the advance.
Also, it is clear from last week's price action that some pros are getting ahead of the rebalancing. Note that Broadcom closed Friday at a record high.
The pullback so far for the NDX is normal. The benchmark has declined five times since March to its rising 20-day moving average. Pros bought the dip on every occasion, and they are likely to do so again. There is support at 15,290. Be ready to buy weakness to that level; any of our positions are expected to work, so don’t labor over the choice. The first resistance point is for the benchmark is 15,932, the July 19 high.
NASDAQ 100 Timing: Members bought ProShares Ultra QQQ (QLD)—a 2x leveraged etf that tracks the Nasdaq 100—at $63.00 on June 28. They then sold the first half of that position on July 19 at $70.59, a gain of 12.1%. Sweet. now set up to sell the second half at $75.70 lmt gtc. Set stop at 64.53 stp.