Nasdaq Bear Market - Time to Buy?

The Ukraine conflict has added to the pain for the Nasdaq, which fell into a bear market last week. Now is the US stock index due to a rebound?

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The war impact

Nasdaq's high concentration of tech stocks means it’s a riskier index that tends to outperform in  uptrends and underperform in downtrends – so in the risk-off environment caused by the conflict in Ukraine, it is very much underperforming. But we also need to be mindful of the effect of the current situation within the context of longer-term trends and monetary policy.

The expectation is that money will cost more in the future as the Fed raises rates to fight inflation. That would suggest the Nasdaq is set to underperform for the aforementioned reasons. However, should the Ukrainian conflict spillover into monetary policy, delaying or reducing the number of rate hikes, that might mean the sell-off in the Nasdaq (-20% from the peak) is overdone.

FAANG

NOTE: The weighting of the Nasdaq is highly concentrated: just five companies make up 37% of the value of the index.

Those five firms are Apple, Microsoft, Amazon, Alphabet and NVidia; they are major players in the growing cloud economy that is growing at a CAGR of 16.3%. Most of these firms are setup to post rising profits because of their cloud investments.

Additionally, unlike many industrial firms that depend on raw materials from Russia, these companies have relatively little investment or market dependency on Russia and are less likely to be affected by the current crisis. 

Recent history

The Nasdaq is more volatile than other indices and has been in bear markets before. Recently, as a matter of fact. The last time was in November of 2018, following a Fed rate hike. The index ended up reversing after dropping a whopping 17% in ten days. The bear market didn't end until the Fed started easing back on its tightening policy. Only then did it go on to rally over 100% in the subsequent three years. Of course, part of that was thanks to the effects of the pandemic.

Nasdaq officially in bear market

The US tech index fell 14% from its 200-day average on February 24. Bulls were quick to buy the dip and it recovered half of the losses by the time of writing. The "death cross" of the 50/200-day moving average on the 25th is a bearish omen. 

Nasdaq must flip the 14k into support to revive its upside potential. However, the real threat could only dissipate if it crosses above its 200-day average at 15125. Holding firm there would restore the potential for all-time highs. 

Bulls could find resistance at 14200 and 14600 in between moves. Below 14k, support lies at 13k, 12k, and even lower.

Source: SpreadEx trading platform

Key takeaways

The Nasdaq remains susceptible to global uncertainty and the general risk-off environment in the short term. But the bigger picture will be more affected by the Fed's rhetoric and actual tightening trajectory, which in the near term could hinge on Russia. 

The index could depend on the performance of its ‘big-five’ and the outlook for cloud investments over the longer term, which is less susceptible to commodity supply-chain disruptions.