What Lurks Behind the Lines on the Chart

The market is in a weird place…

Most fundamental investors don’t want to touch it with a ten-foot pole… while price observers are getting paid to buy the dip like never before.

The tech-heavy Nasdaq 100 Index is now up 19.63% for the year. With that kind of move in just three months, one might think they’re missing out on a ton of growth.

It has outperformed the S&P 500 by the widest margin since the lows of the pandemic. At least then there was a value proposition for it with zero % interest rates and a demand-fueled rally about to unfold.

Yet right now, sales growth for the Nasdaq is currently estimated at an anemic 4.9%. When investors buy tech, they want growth. But 4.9% doesn’t really convey the type of numbers that would make you drop everything and start hitting the buy button at any price.

Especially when you can get the same rate by buying 1-year Treasury bills without taking on risk. That’s an option a lot of people are choosing. In light of the recent bank failures, it’s why depositors are fleeing banks.

When you consider the current benchmark inflation rate of 6% compared to the Nasdaq’s sales growth, you could even say sales are shrinking.

Some of the recent gains are warranted, however.

The growth story for the tech sector seems to be coming from two places:

1. Forced downsizing of operations (i.e., companies are getting “lean and mean” by laying off people)

2. Artificial Intelligence (AI)

From my experience working with private equity and venture investors, getting “lean and mean” is a go-to solution when investors don’t like what they’re seeing…

Not Much Else to Cut

The recent downsizing trend, as we’ve seen from companies like Meta Platforms (META), is not coming from the creative minds of the founders. It’s an appeasement mechanism from investor pressure.

This is why you do see some growth in the Nasdaq in its EBITDA (earnings before interest, taxes, depreciation, and amortization)… which is currently at 14.6%.

But the gains from downsizing can only last so long.

Soon there won’t be much else to cut. And cutting overhead directly hampers growth.

The problem is that people don’t buy tech companies for their excellent cost-cutting measures. High growth is the very reason tech companies get lofty valuations in the first place.

So, downsizing being behind the recent good performance causes me to question the outperformance of the Nasdaq 100 versus the S&P 500 as of late.

META’s 23.28% earnings reaction on February 2 was a clinic on how to tell investors what they want to hear. And when times get murky, the “lean and mean” narrative is music to their ears.

Oftentimes, pet projects inside creative tech firms wind up becoming the next big thing… but those projects get scrapped when cash is tight. It’s the trickle-down effect from a tight credit market and investors taking losses as the Fed jacks up rates.

If I’m buying tech for the growth but corporate actions mimic penny-pinching old economy stocks, then why value them as if they’re still growing?

Yet the Nasdaq 100 is now up 19.63% for the year and 22.68% off its October 13 low. That officially places it in a bull market, if you consider any 20% up-move the real definition of a bull market.

This brings me to the price observers… the technical analysts who think the lines on a chart hold some special meaning.

The Lines on a Chart

I’ll never forget my first year on a trading floor at SocGen (Société Générale). A veteran commodities trader I worked with saw me reading a book about technical analysis and the study of price patterns.

He was in a particular New York state of mind at the time, and said, “You think that’s going to help you? Pull up a chart of corn futures on your screen. Do you see that support line? Now watch what happens…”

He picked up the phone and made a massive order to sell at market prices.

There went that support line.

From then on, I realized there’s something much deeper happening behind the lines on the chart.

Trends usually start in fact… and then wind up morphing into a whole other creation. And they’re fueled by the base human characteristic of fear of missing out (FOMO).

With both the Nasdaq and S&P 500 trading above all widely tracked key levels, a similar situation is now at play.

Recently, within macro trading circles, JPMorgan’s enormous option collar on the S&P 500 has been making the rounds. It’s a part of their put-spread collar in its $15 billion JPM Hedged Equity Fund.

According to Bloomberg, they have around 49,000 call options expiring today (Friday) with a $4065 strike price.

That position means there’s about $20 billion worth of maneuvering that market makers may have to do once these options are liquidated or expire.

The high in the S&P today was at 4057… a few points away from that strike price. That’s not a coincidence. And it’s not a coincidence that the S&P has bounced 100 points right to that price zone over the last two days.

The market does that, testing key levels where it knows there is massive positioning… and it hasn’t failed to do so again.

This is why, in The Opportunistic Trader, we opted to close out our Invesco QQQ Trust Series 1 (QQQ) puts at the lows on March 28 and book our gains. (As a reminder, put options gain value as the asset’s price drops.)

We originally bought them to fade the initial pop in the market after the Fed raised the Fed Funds rate by another 25 basis points (bps) last Wednesday. That market pop was a classic move following a big announcement.

But we also knew the market would move back to test that big position… and it did not disappoint.

All of this comes as quarter-end rolls around.

Right now, we find ourselves with a divergence in the VIX (the market’s “fear gauge”) and stocks following the onset of this month’s banking crisis.

The VIX is trading higher yet stocks are still rising. That’s a seldom-occurring phenomenon that historically doesn’t end well for the stock market.

We’ve been fooled by numerous “official bull markets” in the Nasdaq over the last year. This rally now matches the one from last summer.

So we will now see whether the lines on the chart are a mirage or as good as gold.

The Nasdaq will one day be a good buying opportunity… but that day is not here yet.

Regards,

Eric Shamilov
Analyst, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, a member of The S&P Trader shares their positive experience with the service…

I’m off to a great start. I’ve been a member for two business days and have made daily profits of around $900 and around $2,400. So, the cost of my two-year membership is paid for already.

I have made the specific trades recommended, plus additional duplicate and related trades depending on which way the SPX is moving – and remaining hours before expiration. (Nine total trades so far). Zero losing trades.

– J.R H.

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