The Nasdaq 100 index has diverged with the Dow Jones and the S&P 500 as worries of a hawkish Federal Reserve rose. The index declined by 1% on Tuesday as the other two soared to a record high. It is trading at $16,280, which is about 2% below the highest level last week.
Federal Reserve tightening
The Nasdaq 100 index has done well in the past decade. The index has jumped by over 240% and outperformed the S&P 500 and Dow Jones. The spread between the three indices narrowed in 2021, as worries about the Federal Reserve rose.
The Nasdaq index and Invesco QQQ Fund are highly exposed to the Fed decisions because they are made up of high-growth companies. These firms tend to have fast-growth and low profitability characteristics, making them a bit risky.
The fears that the Fed will tighten its policies this year explain why the index has diverged. In November, the Fed started tapering its asset purchases by $15 billion. With inflation rising, the bank decided to increase the taper to $30 billion in December. As such, if the current pace continues, QE will end in March this year.
The end of QE will then lead to a gradual pace of interest rates tightening. Analysts expect that the Fed will implement about three rate hikes this year, pushing them to about 0.75%.
The ongoing Omicron crisis has led to worries that the rate hiking cycle will be quicker than expected. Recent data suggests that many Americans are calling in sick, meaning that supply chain disruptions will continue. Subsequently, inflation will keep rising, pushing the bank to increase its tapering process.
High-growth stocks fizzle
A quick look at the Nasdaq 100 index shows that some of the best-known growth stocks have been under intense pressure in the past few months.
Block, recently-known as Square, is a leading fintech company that owns Cash App, Square Capital, and Tidal. The company was one of the fastest-growing stocks in the Nasdaq 100 index. Recently, however, worries of slowing growth and rising competition have pushed the stock to the lowest level in 52-weeks. It has dropped by 30% in the past 12 months.
PayPal is another Nasdaq 100 stock that has declined sharply recently. Its stock has fallen by 18% in the past 12 months as worries of growth and competition rise.
Meanwhile, the DocuSign stock price has tumbled by 30% in 12 months. The stock declined by about 40% in a single day in November after it published strong results and weak forward guidance.
Another top laggard in the index is Peloton, the fitness company. Its stock has crashed by 79% in 12 months as worries of its growth and competition has risen.
Other top laggards in the Nasdaq 100 index are Pinduoduo, Zoom Video, Splunk, JD.com, and Activision Blizzard.
On the other hand, the sell-off has been offset by the strong performance of companies like Lucid Group, Nvidia, Fortinet, Moderna, and Marvell Technology.
Nasdaq 100 forecast
The four-hour chart shows that the Nasdaq 100 index has been in an upward trend in the past few months. Along the way, it has formed an ascending channel that is shown in red. The stock has managed to move slightly below the 25-day Moving Average. It is also between the channel while the Relative Strength Index (RSI) has formed a bearish divergence.
Therefore, the index will likely keep falling as bears target the lower side of the channel at around $15,500.
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