Even though the Nasdaq 100 and most stocks have fallen significantly, SQQQ has increased by about 25%. As of right now, the Nasdaq 100 index is sitting near its annual low, having dropped by roughly a third in value so far. There has been a mad dash among investors and speculators to either buy “discounted” stocks or wager on an even larger wave of stock market declines. This year’s decline in the Nasdaq index is typical of what happens in recessions generally. Nonetheless, it has risen significantly over the past six years and is still trading at around 500% above its 2007 high.
Fundamentally, stocks are in a bearish position, especially technology stocks. The sentiment trend is downward, which has a negative impact on the fundamentals of consumers, businesses, and banks. The present value of expected future cash flows drops precipitously as interest rates rise. Further, many technology stocks have seen significant declines in earnings as a result of shifting economic winds, because inflation cuts into profit margins.
Merger and acquisition and initial public offering activity have dropped dramatically in recent years. As central banks around the world scramble to acquire dollars in an effort to halt falling exchange rates, a global liquidity crisis has been triggered by the strengthening US dollar (driven by rising interest rates). The Japanese yen has dropped to a 32-year low as a result of the country’s unsuccessful market intervention efforts, making that country a poster child for this trend. The global reach and banking system effects of major technology firms make them vulnerable to the dollar shortage crisis.
To put it in simple terms, this is not the time to be a dominant player in the technological marketplace. Profitability and future valuation are under pressure from numerous economic factors. Since this is happening on so many fronts at once, it is highly unlikely that the majority of the Nasdaq 100 will experience a turnaround in earnings anytime soon.
Except for Tesla (TSLA), all of these companies have seen significant upward revisions to forward sales so far in 2019. The rate of downward adjustments in 2022 is much higher than in 2020, indicating a more severe fundamental struggle within these businesses. To counteract sharp declines in profitability, many of these companies have announced even larger corporate layoffs in recent weeks.
Everything that matters most with respect to growth stocks is crystal clear. Nevertheless, many investors are scrambling to buy shares of these companies at what they perceive to be steep discounts after their stock prices have fallen by such large amounts. The Nasdaq 100, like most major stock indices, rarely loses more than a third of its value in a single year. So, I think now is a good time to examine the Nasdaq 100 and the stock market’s technical situation in greater detail in order to determine whether or not it is close to “bottom” or “falling knife” potential.
Signals From the Options Market
We can gain a deeper understanding of the stock market’s technical environment from data on option prices. For the past month, both the Nasdaq 100 and the S&P 500 have been stuck near their 52-week low. Consistent investor demand at the June support level has kept the market hovering around it. Investor interest, however, seems to exist only so long as stock prices stay low, as evidenced by the market’s stubborn refusal to trend higher.
$SQQQ #SQQQ 3x inverse $QQQ ETF
ahead of the MegaCap earnings where ~ 40% of the $QQQ reports this upcoming week, BIG DOWNSIDE SPECULATION:
– $SQQQ posts $911M weekly inflow (similar to record weekly inflow 6/3)
will they be right? pic.twitter.com/5GQUaeDt5B
— Christian Fromhertz 🇺🇸 (@cfromhertz) July 23, 2022
These major stock market indices are either at rock bottom or perched on the verge of disaster, in my opinion. If the market does break lower, there could be a tidal wave of selling as “dip buyers” try to recoup their losses. In the event of a bond-centric liquidity event in the monetary system, which the Fed may or may not be able to cover, this possibility could be exacerbated. Once again, economic fundamentals indicate a downward trend in profitability for most major corporations. However, the TTM “P/E” of the Nasdaq 100 is 23X; while I do not consider this a “low” valuation, it is 35% below its level from the previous year, so there is some discount potential.
There is a slight bias toward a bearish market move today, as indicated by the relatively high put-to-call ratio (from the average). Even if the put-to-call ratio is high, that doesn’t mean investors should expect a market decline. In particular, it indicates that people in the options market are preparing for a decline. Contrary to popular belief, a bullish sign can be a high put-to-call ratio, which indicates that investors are extremely cautious about the market’s direction.
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