Nasdaq 100 fails to sustain upside momentum, hinting at exhaustion top
Is the Nasdaq 100 in the process of topping out?
The Nasdaq 100, with a price-to-earnings (P/E) ratio of 41.24, and year-to-date performance of over 16%, to some analysts is looking increasingly toppish. This P/E ratio is based on a stock price of $71.75 per share and an earnings-per-share (EPS) of $1.74. This is a 41% increase from the average of 29.30 over the previous four quarters, making it potentially over-valued.
The fact that the July record high at 20,690.97 has been followed by a swift 15% decline at the beginning of August on fears that the US economy is heading towards a hard landing has spooked some investors.
Bargain hunters made the most of the sharp decline with some making an over 10% profit within a couple of weeks as the Nasdaq 100 regained most of its previously lost ground by rising to its 22 August peak at 19,938.89.
Nasdaq 100 daily candlestick chart
Since then another 7% drop has been seen within the following two weeks before it headed back up this week.
This increased volatility near the Nasdaq 100’s all-time high is seen by some as an early warning signal of the long-term uptrend running out of steam. After all, the index has risen by over 90% in the past couple of years.
Nasdaq 100 weekly candlestick chart
US November presidential election
It is possible that the current corrective phase ahead of the November US presidential election turns out to be like the July-to-October 2023 one which was followed by another bull run. Then again, a more substantial decline and bear market might also be on the cards. Since the last bear market dates from 2021-to-2022, it is unlikely that it’ll be followed this soon by another one, though.
Nonetheless, the fact that volatility has increased significantly over the past couple of months, shows that investors in the mainly technology-driven index have become more jittery. Furthermore, with the so called ‘magnificent seven’ stocks making up 32% - the largest ever concentration - of the index, the risk of a potential bear market forming if these underperform, is significant.
From a technical analysis point of view the long-term uptrend is intact and will remain so, as long as the April and August lows at 17,435.39-to-16,973.94 underpin. This support zone giving way remains a risk, though, especially since September and October tend to historically be months in which the US stock market declines in US election years.
S&P 500 Index Average Monthly Returns In Election Years (1950-2023)
According to Elliott Wave analysts, the Nasdaq 100 is already in a bearish abc corrective chart formation. A fall through the April and August lows would probably trigger a sell-off to below the November 2021 high towards the 15,932.05 July 2023 peak. The next lower 200-week simple moving average (SMA) at 14,631.64 and the October 2023 low at 14,058.33 also represent possible downside targets. Around these levels, were they to be reached at all, a long-term buying opportunity would present itself, however.
Not all doom and gloom
A rise and weekly chart close above the 19,938.89 mid-August high would likely lead to analysts dismissing the current gloomy mood and may instead lead to new record highs being made.