Nasdaq soars as dip buyers pile into tech stocks

The index rallied on Tuesday towards its best day since November, but strategists warn the tech rout may not be over

A day after the Nasdaq 100 fell more than 10 per cent from a record into a technical correction, the tech-heavy benchmark is making a resounding comeback.

As of early afternoon in New York on Tuesday, the Nasdaq 100 was up 4 per cent, with roughly a quarter of the index’s members surging more than 5 per cent. ARK Innovation ETF, star manager Cathie Wood’s flagship fund that has suffered losses of at least 10 per cent in each of the past two weeks, jumped the most on record, adding 11 per cent. Shares of Tesla, which had fallen more than 30 per cent from January levels, jumped 15 per cent. Stay-at-home market darlings Peloton Interactive and DocuSign each rose more than 10 per cent.

Such is the aftermath of a technology sell-off that, by one measure, reached the most oversold level in three decades. Data show droves of investors have been rushing to buy the recent dip, a strategy that – at least on Tuesday – was looking smart.

“This whole idea of buying on the dip has been so ingrained in people’s psychology that you are going to see bounce backs after multi-day sell-offs,” said Marc Odo, client portfolio manager at Swan Global Investments. “That’s inevitable, unless there is some big event on the news where everything has changed.”

In recent weeks, a rise in bond yields sparked a sell-off in high growth stocks, with more than $1.5 trillion wiped off the Nasdaq 100 in less than a month. Expecting higher economic growth and possible inflation, investors poured into industries perceived to benefit – including banks and energy – while using big tech as a source of funds.

The equity market rotation was swift. Frank Cappelleri, Instinet's senior equity trader and market technician, noted that on Monday the 14-day relative strength index of a ratio of Nasdaq 100 price performance versus the S&P 500 Index hit the most depressed level since 1990.

Other measures also pointed to an oversold market. At Monday’s close, the Nasdaq 100 traded 6 per cent below its average over the past 50 days, the biggest discount since last April. At the same time, its 14-day RSI, a measure of the degree to which gains and losses outpace each other, fell to the lowest level in a year to near 30, a threshold that’s usually seen as a sign that stocks are poised to rebound.

Another catalyst behind tech’s rally may have come from the bond market, where rising yields that had put pressure on richly valued growth stocks are showing signs of easing. That’s not unexpected. Strategists from Citigroup and UBS Group warned earlier this month that the yield-fuelled equity rotation had embedded rates way higher than their actual levels, setting the stage for a potential reversal should yields stabilise or pull back. Rates on 10-year Treasuries hit a 12-month high of 1.62 per cent last Friday and have since retreated.

“Wall Street is a one-way street right now and it is going whichever way the Treasury market takes it,” said Edward Moya, senior market analyst at Oanda. “The move in tech stocks coincides with the rally in Treasuries, so many traders will be skeptical that this rebound will stick.”

Wall Street is a one-way street right now and it is going whichever way the Treasury market takes it

Dip buyers in tech stocks got a day of vindication as the Nasdaq 100 rallied on Tuesday towards its best day since November. As the benchmark fell into a correction over the past few weeks, there was no shortage of bottom fishing along the way, at least going by Bank of America’s client flows. Over the past four weeks, everyone from hedge funds to individual investors were big buyers, with average tech inflows reaching a record high, the bank’s data showed.

While strategists from RBC Capital Markets and Morgan Stanley have warned that the tech rout may not be over, Tuesday’s action gave hope to tech faithful that it’s not a lost cause. To Deepak Puri, chief investment officer for the Americas at Deutsche Bank Wealth Management, technology and sustainability are two of the cornerstones for most medium- and long-term investing theses, and a 10 per cent pullback isn’t likely to change that.

“It had to happen. The Nasdaq, the last time I checked, it was up 75 per cent over the last three years,” he said. “Correction territory should not be thought of as the start of some massive recalibration. Markets go up and they go down.”

Still, to Lori Calvasina, head of US equity strategy at RBC Capital Markets, the latest tech carnage hasn’t fixed the valuation problem. At 26.2 times forward earnings, software and internet stocks are not only trading at a 43 per cent premium relative to their own history but also remain elevated versus the S&P 500, the firm’s data show. Moreover, the firm’s model on fund positioning indicates that sentiment has yet to reach levels that typically signal a market bottom.

At the same time, large rallies – such as Tuesday’s – often happen in the middle of deep sell-offs. Take last March, for example, when the Nasdaq 100 staged five rallies of more than 4 per cent before bottoming on March 20.

“The big tech unwind may be at least halfway done,” Ms Calvasina wrote in a note, adding, but it “isn’t finished”.