This Says The NASDAQ Is Set To Explode

This Says The NASDAQ Is Set To Explode

The Nasdaq has been beaten up heavily last year, ending down 33%. But i believe there is a good chance it will end up the year ahead of the S&P 500 this year.

Here’s why:

  • Fed easing will ignite “long duration” stocks more than money makers
  • Technicals suggest NASDAQ is oversold
  • They are starting to be cheap

Let’s look at the second reason first. Look at the chart. It shows the Nasdaq back to 2015. Clearly a gigantic bull market but a clear bear market last year. But the chart shows some evidence that the bear market is over or nearly over.

Notice that the chart also has a red live on it. That red line is the RSI or Relative Strength Index.

First, notice in June it went below the 30 line which is the horizontal red line. That is a point where the market nearly always rallies and it did.

But now look at the price action recently. The market made a low in October and then another one in late December.

But the RSI did not make new lows. Each time the price made a new low, the RSI made a higher low. This is called divergence.

I occurs when a market is running out of momentum. In this case, it shows that the bears cannot press the market lower at the same rate they could before in this bear market. That also means that the bulls are beginning to gain some strength. The bulls aren’t in control yet but the bears are running out of gas. It is only a matter of time before the bulls take over control of the market.

It is usually a sign that the market will rally. Note that in October, the divergence worked perfectly.

We just had another divergence which means that the Nasdaq should rally again here in January. This type of divergence is usually good for a multi-week rally and sometimes more.

Let’s look at point 3 above. Nasdaq stocks are now cheap compared to S&P stocks. In 2021 they were expensive but their savaging in 2022 has pushed their valuations to below the S&P. In particular, the Covid stocks, like Zoom, Netflix, and Amazon are now very cheap.

We shouldn’t buy something just because it is cheap. We need for that cheap stock to begin a bull market before we buy. But we should certainly be putting cheap stocks on our watchlist to monitor.

Finally, let’s look at the first point above. What does it mean?

Long duration stocks are stocks that are often not making money. Their profits are in the future. That could be stocks like biotech which need years to create and market a drug to high tech stocks like Uber which have yet to make a profit but keep promising to.

Let’s be clear, even a stock like Tesla, which pages a profit, doesn’t make money from selling cars. That is a massive money loser. They make money selling carbon credits. They are really making money due to tax and credit incentives promoted by the US government. As an operating car company, they are bankrupt. They are also a long duration stock.

Short duration stocks would be companies with strong balance sheets and real profits right now.

Short durations stocks, like the Dow Industrials, have dramatically outperformed the long duration stocks like the Nasdaq.

Why? The Fed.

Rising interest rates help short duration stocks compared to long duration stocks.

So that means that long duration stocks will take off when the market has decided that the Fed is through raising rates. The market hasn’t done that yet so long duration stocks are still suffering.

But the time will come this quarter when the market will think that the Fed is through and start to buy Nasdaq type stocks with both hands. Then, when the Fed actually eases money supply, the Nasdaq will outperform the S&P and Dow by a long shot.

I’ll keep you posted when that happens!

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