Following late July/early August slumps, some technology-heavy indexes are rebounding. For example, the Nasdaq-100 Index (NDX) gained 5.47%. A solid start, to be sure. Still, NDX closed the week 5.66% below its 52-week, confirming there’s more work to be done in tech.
Investors considering exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) and other tech-heavy assets, there are some market clues to consider. Using the MSCI ACWI Index as the gauge, sentiment toward large-cap tech and growth stocks improved last week. That could be a sign market participants are ready to revisit some of the QQQ/QQQM holdings that were recently punished.
Tim Hayes, global chief investment strategist at Ned Davis Research (NDR), pointed out that the ratio between the ACWI Growth and Value indexes recently turned in favor of the former. This is another sign that could augur well for ETFs such as QQQ and QQQM. As Hayes observed, the primary growth sectors are tech, communication services and consumer discretionary. That trio combines for over 78% of the Invesco ETFs’ rosters.
Risk Appetite Could Help QQQ
In order for ETFs such as QQQ and QQQM to rebound in earnest, animal spirits need to be renewed. According to NDR’s Hayes, there are some inklings that is happening.
“As the Tech sector’s relative strength is a component of the NDR Risk-On Index, its rebound has helped the index recover,” noted Hayes. “And the index would benefit from relative strength improvement from the Consumer Discretionary sector, an index component that has yet to join the other Risk-On Index components as they have come back from the recent bottom. Their uptrends have been consistent with their positive correlations with the ACWI, indicated in the upper right of each clip.”
The NDR expert added that the firm’s proprietary risk on/risk off (RORO) gauge moved in a positive direction last week. That could be a sign market participants are ready to buy back into growth and tech stocks.
“We will also be watching to see if RO/RO breadth confirmation is provided by our diffusion indices, which compare the percentage of Risk-On components that are above their moving averages to the percentage of Risk-Off components that are above the smoothings,” concluded Hayes. “When there are more Risk-On components above the smoothings than Risk-Off components, the breadth message is relatively positive, whereas the breadth is relatively defensive when more Risk-Off components are above their smoothings.”
Bottom line: patience is required. Still, recent action in the NDR ratios suggests growth stocks could be ready to bounce back.
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