Bears began Monday by cautiously trading punches with bulls. By the end of the session bears were again hanging on for dear life, battered and bruised by a barrage of late afternoon body blows, states Jon Markman, editor of Strategic Advantage.

The Nasdaq 100 index closed at 17,596, a gain of 1%. Although the rally leaves the NDX shy of its record, the bears are wobbly. Investors are buying every dip in technology share prices, even the inconsequential ones. A big part of this story is capital inflows for passive investments like exchange-traded funds. Investors chasing 2023 big tech investment themes have been pouring money into technology-based ETF investments. 

This strategy was entirely predictable. Money always chases performance, even blindly. It was also predictable that hedge fund managers would be left out of the early rally this year. Goldman Sachs reported last week that their hedge fund clients are eschewing the tech rally in favor of beaten-down Chinese internet stocks. Pros invested nearly $12 billion in Chinese equities last week, the largest inflow since 2015. 

This discrepancy is important because big tech companies will begin this week to roll out financial results. Microsoft (MSFT) and Alphabet (GOOGL) numbers are due Tuesday after the close. (AMZN) and Meta Platforms (META) will report on Thursday. If numbers for big tech surpass expectations there is a decent chance that pros will be forced to buy in, leading to a parabolic advance. 

Pros are beginning to hedge. Smaller stocks have come to life again. The iShares Russell 2000 (IWM) ETF, a key metric for lower capitalization shares, surged Monday by 1.8%, the biggest gain among the popular stock averages. Pros typically add exposure to smaller shares when they are anxious and behind their benchmarks. Smaller shares rise faster than the NDX in buoyant markets. 

None of this bodes particularly well for bears. They are clutching and gasping, trying to stay upright as the bulls pound away. The NDX has support at 17,058, the rising 20-day moving average. The first resistance level is 18,296.

Even at New Highs, Further Nasdaq Gains May Loom

Researchers at Bespoke Investment Group observed that since its bear market ended on Dec. 28, 2022, the NASDAQ Composite has surged over 50% to the new bull market high. Through Friday, the tech-heavy index was up 36% over the past year.

The analysts note that it’s easy to look at those kinds of gains and think the easy money has been made and more gains are unlikely in the near term. But like most things about market behavior, the reality is quite different, and double-digit gains over the next year are achievable too.

They point out that there isn’t much rhyme or reason to the relationship between trailing returns and forward returns...with one exception. When the index performance over the past year is in the top decile of all periods, the NASDAQ composite performance is very weak. But in the ninth decile (which is the current state), returns average an impressive 14.6% over the next 12 months, according to the Bespoke research.

Past developments might not hold firm, but historical analysis offers one of the few logical ways to assess human behavior at the root of all stock movements. As for value, the NASDAQ composite is valued at 4.06x sales in aggregate, well below the 5x sales multiple from 2021, the analysts report. No guarantees but make a note of this data or just buy the Invesco QQQ Trust fund and let’s check back in a year to see if the nearly 15% potential gain holds up.

Learn more about Jon Markman here...