Market Analyst at FXTM
US
equities are set to fall further on Friday with futures now in the red and led
once more by tech stocks.
The Nasdaq Composite Index saw a 4.96
percent plunge on Thursday which was its biggest single-day decline since 11
June, while the S&P 500 dropped 3.5 percent. The selloff was likely fuelled
by concerns that the tech sector’s lofty valuations may prove unsustainable
triggering a wave of profit-taking, which also left a trail of carnage in the
options market.
From a technical
perspective, the drop was necessary and healthy as it brought the Nasdaq’s
14-day relative strength index (RSI) away from severely overbought levels. And
such a move shouldn’t come as a surprise. Since
the index began bouncing out of a bear market in March, it has seen a pullback
whenever its RSI has hit or crossed above the 70 threshold, which denotes
overbought levels. This week’s drop may have been more violent given that the
Nasdaq had been allowed to gather so much froth, as the RSI even breached 80
earlier this week.
Perhaps
market participants are rebalancing or simply profit-taking ahead of the Labour
Day weekend. How stock markets perform once trading resumes next week may be
more indicative of whether a trend is truly forming.
It remains to be seen
whether the tech titans have had their time in the sun and whether the rotation
into the laggard sectors like financials could leave a big dent in Big Tech’s
near-term performance. Even after Thursday’s selloff,
valuations remain stretched with the Nasdaq Composite Index’s P/E ratio still
above 60. However, should this pullback extend into a 10 percent correction
that may prove too tempting a buying opportunity for fans of Big Tech, who
could then swarm back in and restore bullish momentum to the Nasdaq.
After
all, the fundamental backdrop still includes major elements that are conducive
for the tech sector. The Fed is willing to let the US economy run hot which is
supportive overall of equities, while the ‘new normal’ ensures the world
remains reliant on Big Tech even as the pandemic rages on in major economies.
It’s also important to note
the looming potential catalysts. A US non-farm payrolls report that reads
better than the expected 1.35 million print could stop the bears in their
tracks today, prompting the resumption of equity gains. Focus
will then turn to the next round of US fiscal stimulus, which if approved by
the Senate that reconvenes next week could also reignite tailwinds in benchmark
US indices.
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