The Nasdaq 100 index has recently experienced a significant decline, leading many investors to reevaluate their positions. This downturn, which has persisted for three weeks, is noteworthy given its nearly complete erasure of gains achieved following the recent U.S. presidential elections. Investors and analysts alike are closely monitoring the implications of rising Treasury yields, particularly the 10-year U.S. Treasury, which has shifted the desirability of equities, especially within the technology sector often represented by the Nasdaq 100.
The relationship between Treasury yields and equity attractiveness cannot be overstated. As the 10-year U.S. Treasury yield continues to trend upwards, it casts a shadow over stock valuations. This is particularly evident when examining the S&P 500 Shiller excess CAPE yield, which serves as a benchmark for assessing stock market valuations against the backdrop of government bond yields. The decline in the excess CAPE yield from 1.94 to 1.10 since September indicates that the S&P 500 is becoming increasingly overvalued relative to U.S. Treasury bonds. Such a scenario complicates the investment landscape for equities, especially if interest rates advance further or economic growth does not meet heightened expectations.
The fear that corporate profit margins may dwindle under the pressure of higher borrowing costs exacerbates this concern. Although policies from the current administration, such as deregulation and corporate tax reductions, may offer a financial cushion, they appear insufficient to counterbalance the rising expenses associated with increased interest payments on debt.
As of January 13, 2025, the Nasdaq 100 index’s critical support level stands at 20,790. A breach below this psychological threshold could trigger further declines, propelling the index closer to its intraday low of 20,538. Given that the index has already retreated approximately 6% from its recent all-time high established on December 16, 2024, the fragility of current market momentum is apparent.
The trend indicates that investor sentiment has soured, as evidenced by the proportion of Nasdaq 100 component stocks above their 200-day moving average. This metric has slipped from a post-election peak of 70% to just 53%, reflecting broader weaknesses in market breadth and hinting that many stocks are struggling to maintain robust price levels. Such shifts often suggest a less favorable environment for sustained upward trends in the index.
Market Momentum and Future Considerations
The analysis of technical indicators reveals a concerning picture for the Nasdaq 100. The daily Relative Strength Index (RSI) has formed a pattern of lower highs and lower lows since late December, signaling a continuation of bearish momentum. While one could argue that growth remains a strong thematic investment, particularly in technology, the current market structure does not lend itself well to bullish sentiment without substantial catalysts.
For the bulls to regain momentum, the Nasdaq 100 would need to reclaim its position above the pivotal resistance threshold of 22,470/4,980. Only then can it potentially ignite a renewed bullish phase, with further resistance levels at 23,980, 24,440, and 25,080 looming ahead as targets. Failure to achieve this, especially with ongoing economic challenges and elevated Treasury yields, could suggest further retracements are imminent.
In light of these developments, investors must tread cautiously, weighing both macroeconomic indicators and technical analysis. The increasing cost of capital, as demonstrated by rising Treasury yields, combined with declining internals within the Nasdaq 100, suggests that a more conservative approach may be warranted. Understanding these market dynamics is essential for positioning portfolios effectively in the face of a potentially volatile economic environment. Overall, the current market landscape underscores the importance of vigilance and adaptability in investment strategies to navigate these uncertain waters.