NDAQ: No man’s land
Summary:
● A look at the lay-offs
● Analysis of NDAQ
● Investment Recommendations
Bombs Away! The tech space is crawling with layoffs amid fears of an incoming recession. Soft landing my A**. According to reports, tech companies collectively laid off over 150,000 workers within 2022. This situation seems to be getting worse as over 500 tech companies have reported laying off the SAME amount of employees within the first two months and a half months of 2023.
This clearly shows that 2023 is set to be a mere casual swim through the deadly Mariana trenches as tech giants like Amazon (AMZN), Microsoft (MSFT), Google (GOOG), IBM (IBM), and well, basically every tech company, are under intense pressure to announce continued layoffs.
Make sure you bring your wetsuit and just swim real fast if you feel something glide by you. It’s probably only the bond market undercurrent. It’s okay little buddy, you watched your sink or swim tutorials right? I’m sure they’ll manage you through this.
A major announcement by Meta (META) in November 2022 that it would slash jobs, and then resonating reports by well, the whole Nasdaq (NDAQ), came right down the middle like a jab from Baby Creed. Daily announcements surfaced that companies were laying off their over bloated SalesForce (CRM) style, hot air balloon labor force. All of which was as embarassing as Matthew McConaughy even starring in that commercial. Seriously, someone needs to tell him to talk to his agent….immmediately.
This quickly hallmarked the reality that the companies once leading the 10-year bull market are beginning to adapt to a new reality. We can easily say that the tech space is flying in the face of multiple headwinds, rising interest rates, persistently high inflation, and it's about to face plant like a skater on YouTube.
These layoff trends are bound to continue all year, particularly in the tech industry which has suffered a great impact from the Fed’s tightening agenda.
So, what does this mean for Nasdaq?
Let’s do some analysis to find out.
Personal IB Market Chart
In a prolonged sell-off, I can see where it could go down to long term support of $40 a share dating back to 2012.
There is also a 10-year monthly support uptrend line that coincides with the Fibonacci retracement starting back at December 2018 lows up to post-pandemic highs where it coincides right at the $43 space.
It could also go back to the 100% Fibonacci but if it breaches that long-term support then the next stop would be $36 at the 100% support line at the Fibonacci retracement.
2023 has been marked by the presence of consecutive lower highs, lower lows, crossovers, and no growth.
So what we have in context is a 10-year monthly uptrend that is marked by a prolonged sell-off which coincides with a Fibonacci retracement from the 2018 sell-off up to the post-pandemic highs with coincided support of $35-43 in a prolonged sell-off. Short-term basis of 3-6 months, expect to find support in the $50-60 range.
I wouldn't suggest investing in the Nasdaq based on the following technical reasons:
It made a lower high in December 2022 from its previous high of November 2022 which is indicative of formations of consecutive lower highs
It has had four down months where it closed higher than it opened
The current month’s candle has fallen below all the moving averages which is a sign of a systematic breakdown and an emerging sell-off
We have an RSI that is approaching lows not seen since 2012
And a zone indicator that’s downgraded for the first time in a long time.
Personal IB Market Chart
On the weekly charts, we have had a breach below the long term moving average and support levels at $55 which has been marked by seven out of eight down weeks and is clearly turning out to be a down channel
There is also the presence of a down trend change which was last seen in January 2022 making it a strong indicator of a continued downtrend.
Further sell-offs would see a bumpy ride to the 161.8% at $42 and a look for support at the 100% Fibonacci level around $36 per share leading to a max drawdown of 40%.
With mixed signals on the Nasdaq index it’s easy to call it no man’s land as there is a presence of two rising valleys and the tendency of a third that could go all the way to $72 or it could break down fundamentally and hit its chin on the ladder falling down to find long term support between $40 to $43 per share. This gives us a range bound percentage of approximately 100% over the next 12 months which is typical of this index.
Personal IB Market Chart
Weekly RSI is currently at lows not seen since before 2016 which might indicate an oversold situation or a continuous breakdown for the index.
On the zone indicator, it downgraded several jumps and has now had consecutive down weeks with the share price slipping below all of its moving averages.
Personal IB Market Chart
On the daily chart, price is under the moving averages and immediately approaching historically oversold markers on the RSI.
This clearly establishes a down trend. It’s clearly in no man’s land. NDAQ could go up, down, or take a coffee break.
What do I recommend?
Sell-call options and sell-put options for a trade range bound of $54 to $72 a share. This would give an exposure for getting premiums in between the range over the short term. Therefore it’s a hold recommendation, I am not issuing a buy rating or a sell rating. You can sell call options short term for $72 if you’ve missed opportunities of collecting premiums on put options for $54 as it has expectedly stayed range bound for the past two months. If it breaks down systematically, then it would fall onto a long term trend line hence providing a one year trade bound range between $40 and $72 where options can be placed.
Fundamentally, money is being pulled out of tech investments, as there has been a re-rating evaluation surrounding tech companies.
With 2022 being a year of drastic re-rating of tech companies in general, there’s going to be a sharp pullback on tech investments in 2023, and tech companies have stated as much. We also have most tech companies that are “right-sizing” their work force which means revenue and profits are going down.
In spite of the revaluation of most tech companies, the Nasdaq as a weighted index has held up reasonably well.
Personal IB Market Chart
Daily chart is breaking below an uptrend pattern even after getting right above the 261.8%
NDAQ is not oversold or overbought by any metric, the different time chart is a mixed result of ratings on day, week, and month, which means the market is undecided.
Had you collected paltry premiums in this way each month in 2022, then you’d have collected enough premiums to offset the drawdown in the Nasdaq itself.
I believe that fair value is $52 a share on this stock based on what i believe should be a normalized PE for the TTM at 24 times normalized earnings. It’s above its 5 year average which means that it needs to come down in value. I believe that the current earnings multiple is not indicative of the rate environment and current economic headwinds. I strongly believe the NDAQ is overvalued by almost 20%.
In conclusion, Nasdaq is now a "show me" index, where it has to show investors what it’s going to do and I wouldn’t advise accumulating a large position. With tech companies right sizing their work force and not focused on growing but on improving the bottom line, I can say that the tech space is no longer in growth mode for at least the next 12 months. As the end of the quarter comes close, we should expect to see during rebalancing periods; a lot of institutions adjusting their risk exposure to the NDAQ index in general for more defensive index funds.