Big Tech rally showing signs of overheating
This year’s searing Big Tech rally is showing signs of overheating, with at least one technical measure suggesting a pullback might be right around the corner.
The stock surges at major technology firms, including Microsoft Corp., Alphabet Inc., Amazon.com Inc., Nvidia Corp. and Meta Platforms Inc., have propelled their relative strength index — a 0-100 gauge of bullish and bearish price momentum — above 70 in recent days. Such an elevated RSI level is generally considered a contrarian signal a decline is imminent.
The Nasdaq 100 Index, home to those tech heavyweights, on Thursday also entered so-called overbought territory for the first time since February.
Gurmit Kapoor, cross-asset sales trader at Aurel in London has been bullish on the tech-heavy index for some time, but now reckons the broader Wall Street benchmark might be a better bet.
“Now may be a good time to switch to long S&P 500 outright or versus the Nasdaq 100,” Kapoor said. “There may still be little upside or outperformance in the Nasdaq 100 given its momentum, some FOMO and the AI buzz, but eventually a long S&P 500/short Nasdaq 100 trade will gather attention.”
Here are three more charts summarizing the headwindss for Big Tech’s rally.
Call volume frenzy on Nasdaq 100
Buzz around artificial intelligence is arguably the biggest driver behind large bullish bets on the Nasdaq 100, where call volumes have hit their highest level since 2014. These are essentially contracts that allow holders to buy the underlying stock. Tech bulls have also received impetus from the likely end of the Federal Reserve’s rate-hike cycle, companies’ hefty cost-cutting efforts and signs of a positive outcome in U.S. debt-ceiling deadlock, thus averting a catastrophic default.
S&P 500 poised for comeback
This year’s tech rally has lifted Apple, Microsoft, Alphabet and Amazon at least 30 per cent and doubled the value of Nvidia and Meta. That’s given a 26 per cent boost to the Nasdaq 100, almost three times the S&P 500’s gain.
Based on the relative strength index, the ratio between the S&P 500 and the Nasdaq is now heavily oversold. It is also approaching a sevenyear downtrend line, off which it bounced last year. The S&P 500 meanwhile appears to be on the cusp of a breakout, having closed Thursday at its highest level since last August.
Stretched valuations
The market moves have triggered a sharp valuation re-rating, lifting the Nasdaq 100’s forward P/E ratio to the highest in a year. This surge is increasingly at odds with how inflation-protected bonds are trading.
UBS Wealth Management CIO Mark Haefele said the first-quarter tech earnings decline had been shallower than expected but the sector is, nonetheless, his least preferred. Global tech stocks now trade at more than 23 times 12month forward earnings, he noted, a 32 per cent premium to their 20year average.