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Nasdaq 100 Plunges into Free Fall as US Yields Reprice Higher, Earnings in Focus

Nasdaq 100 Plunges into Free Fall as US Yields Reprice Higher, Earnings in Focus

Diego Colman, Market Analyst

NASDAQ 100 OUTLOOK:

  • U.S. stocks dive as Treasury yields explode higher
  • Nasdaq 100 leads losses on Wall Street and drops more than 2.5%
  • Corporate earnings will remain the center of attention over the next few days

Most recent: Value Stocks Shine as Growth Proxies Sag; Tug of War Between IWD & IWF Gets Hot

U.S. stocks retreated across the board on Tuesday coming off the long holiday weekend, dragged down by rising U.S. bond yields and concerns over the course of the economy following weak NY Empire State Manufacturing data.

At the market close, the S&P 500 plunged 1.84% to 4,577, its lowest level since December 20, as the VIX Index surged almost 20%. The blue-chip Dow Jones, meanwhile, dropped 1.7% to 35,300, weighed by the sharp pullback in Goldman Sachs’ shares, which tanked 7% after worse-than-anticipated Q4 financial results. Elsewhere, the Nasdaq 100 led losses on Wall Street, plummeting 2.57% to 15,210 amid widespread tech weakness.

During the session, U.S. Treasury rates repriced higher across maturities on expectations that the Fed will raise borrowing costs aggressively this year and bring quantitative tightening into the policy mix earlier than initially envisioned to tackle rampant inflationary pressures. Up until a few days ago, investors were discounting only three interest rate increases for 2022, but now see a fourth hike as highly likely. Against this backdrop, the 2-year yield briefly spiked to 1.05%, a level not seen in almost 24 months. The 10-year also shot up, reaching 1.87%, its highest mark since January 2020.

Rising yields weigh on equity valuations by increasing the discount rate used to calculate the present value of future cash flows; however, the impact is more pronounced on risk assets when adjustments are swift and abrupt. This is what has happened over the last 30 days, with the 10-year up ~46 bps, an increase of more than 2 standard deviations above the mean over the monthly horizon.

Stocks also react differently to changes in rates, but the most expensive names that command exorbitant multiples, such as those in the tech and growth universe, are the most sensitive. That said, it is not surprising that the Nasdaq 100 has declined more than the other major averages in recent weeks, down about 9% from its December peak.

Over the next few days, corporate results will steal the spotlight, especially the outlook for the coming quarters. If guidance remains constructive and margins healthy despite elevated inflation, stocks could rebound once Fed-induced jitters subside, although some sectors, such as technology, will stay vulnerable in the near-term.

NASDAQ 100 TECHNICAL ANALYSIS

The Nasdaq 100 has accelerated the sell-off after breaking below an ascending channel in place for over a year. With Tuesday’s moves, the index is now approaching key support in the 15,150 area, the January low. If bears manage to drive the price below this floor, the 200-day simple moving average near the 15,000 psychological level will become the immediate downside focus, followed by 14,800.

On the flip side, if dip buyers swoop in and the tech benchmark pivots higher, resistance is seen at 15,525, but if bulls drive the index above this barrier, we could see a rally toward the 16,000 zone over the short-term.

NASDAQ 100 TECHNICAL CHART

Nasdaq 100 Plunges into Free Fall as US Yields Reprice Higher, Earnings in Focus

Nasdaq 100 (NDX) chart prepared in TradingView

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---Written by Diego Colman, Contributor

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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