From the desk of Steve Strazza @Sstrazza
This week’s Mystery Chart exercise gives us a nice glimpse into the current sentiment amid the recent volatility, so thanks to all those who responded. The overwhelming majority of you we’re either selling or doing nothing, which comes as little surprise.
Many of you wanted to sell this chart aggressively and even cited the current market environment as part of you’re reasoning. But! The chart was inverted… so all those who were pounding the table to short it were actually buying the Nasdaq 100 (QQQ) relative to the Russell 3000 (IWV).
I’m curious to see how, if at all, this changes your perspective on the chart. Tweet me @sstrazza with your thoughts!
This is an uninverted view of the same weekly chart but we’ve included the 14-period RSI to illustrate the strong momentum supporting this structural uptrend.
Click on chart to enlarge view.
As you can see, the Nasdaq 100 has been steadily outperforming since the early 2000s and just surged to its highest level in 20-years relative to the broader market. Momentum just recorded its highest reading ever on both a daily and weekly timeframe which supports the recent breakout in price.
Relative trends, like this one, that have been in place have more or less remained in place and even accelerated during the recent volatility. We made this point very clear in a post last week. One of the strongest relative trends we’ve been pounding the table on for years is the outperformance of the technology sector (XLK) and the tech-heavy Nasdaq relative to other major US indexes.
So what makes this relative trend so important? Do we want to put on a pairs trade based on this? Nope.
We simply want to study the Nasdaq because it continues to be the leader among global equities and thus provides vital information into the health of the overall market.
The Nasdaq 100 Index has been the strongest index in the US and abroad for a very long time now. It is the only major US Index that did not violate its December 2018 correction lows during the recent selloff. Considering it just broke out of a multi-decade base relative to US equities, we have little reason to expect this outperformance to slow down anytime soon.
We like to follow the leaders as they often give an early tell and should lead the rest of the market higher once a tradeable low has been made. To be clear, that is not to say that continued outperformance from the Nasdaq is an indication that equities should trend higher on an absolute basis. The index has been steadily outperforming since 2002, including during the Financial Crisis when equities fell over 50%.
Instead, we’re looking for the Nasdaq to make a tradeable low on an absolute basis as a sign that stocks, in general, have finally put in a bottom.
As you can see, 170 has been a clear level of interest for years now but has recently become a battleground between buyers and sellers as the level was successfully defended just about every day last week and again on Monday. In fact, prices closed just marginally above 170 Monday before exploding higher in the sessions since.
Despite the Nasdaq grinding higher the last few years, 170 is where prices peaked in Q1 of 2018 which is also when many global indexes and US sectors put in their highs for the recent bull cycle. This only reinforces the importance of this level. Here is a closer look at the insert in the chart above which shows the recent price action around 170.
So this is now our line in the sand for the Nasdaq 100 ETF and US Equities overall similar to 2350 in the S&P 500 Index (SPX), which JC outlines here. If one of these levels breaks, the other is likely to follow, so we’ll be keeping a close eye on both.
The bottom line is that the Nasdaq’s relative strength has made it clear that it is a very important index to pay attention to and buyers and sellers have made it clear that 170 is a very important level to pay attention to right now.
If we’re above this level, the near-term risk is to the upside in equities. On the other hand, if QQQ is below 170, then we want to get out of the way and anticipate further downside. Because if the leader is faltering, it’s unlikely that the breadth and momentum divergences we’re seeing in the other markets (like the S&P 500 & Emerging Markets) are still intact.
In my opinion, this is the most important chart in the world right now. Let us know what you think!