Nasdaq Up 17% YTD, Can the Trend Continue?

The tech-heavy index has continued to rise so far this year, despite the worries in the financial markets. Can the trend continue after registering a 17% rise this year?

The Fed is Back!

The Nasdaq not only has many tech companies but also has a larger weighting (more on that later). Those higher-valuation stocks tend to depend on the Fed, with lower-cost borrowing helping support tech stocks in general. The Fed has been on a campaign to bring down inflation, by raising rates and shrinking its balance sheet, until now.

Of course, we all know that the Fed hiked rates by a quarter of a point last time, so policy tightening keeps happening. But if we factor in inflation, real interest rates are still negative. The benchmark ten-year Treasury has a yield of 3.38%, while inflation was last reported at almost double that at 6.0%. The thing that isn't talked about a lot, however, is that the Fed quietly restarted quantitative easing since the outbreak of the regional banking chaos.

Putting the Pieces Together

So far, the Fed has reversed about a third of its QT since the start of the tightening process. Without an official statement, it's not sure how far it will go or when (or even if) tightening will resume. Yields have been coming down, lowering borrowing costs, which would logically support the tech-heavy Nasdaq.

The next thing is that the gap between the weighted and equity performance has continued to grow and hit 749bps by Friday's close. That means investors are piling into the larger cap tech companies, offsetting losses in smaller cap firms. Among those are Meta and Tesla (both up over 50% since the start of the year), which combined have a weighting of just over 6%. The dynamics mirror activity in the banking sector, where worried investors are removing money from smaller banks and putting them into bigger ones. 

Nasdaq Reveals Open Wedge

The Tech index put a 7-month high last week but failed to extend gains to the 13k handle. If bulls are able to take control of the ceiling, 13720 is the next major resistance. Falling from current prices might see the index slide towards 11680, which is the last resort for bullish price action from a technical perspective.

The chances of an open wedge forming remain elevated, somewhat adding to the bullish thesis, especially with the new high increasing the probability of having finished correcting.

Source: Spreadex / US TECH 100

Key Takeaways

The Nasdaq has managed to gain 17% so far this year, helped by the Fed and the reintroduction of quantitative easing. The trend of investors pouring their money into higher-valuation tech stocks has been strengthened. The Tech index is currently at its seven-month high, with 13720 as the next major resistance level and 11680 as the bottom support should the index fall. Although chances of an open wedge being formed remain elevated, the overall prospects for the Nasdaq look to be biased up.