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WEEK AHEAD: MARCH 08

Short Description

Tech stocks and the Nasdaq 100 index that is very heavily weighted in tech have been falling so I analyse what could be next, while also running through the week’s economic calendar. Thanks! Rich

Video Script

Is the Nasdaq 100 in trouble? - THE WEEK AHEAD (Mar 8-12, 2021)

 

Hi everyone, so it’s time for another preview of the week ahead in financial markets. This week I’m paying particular attention to tech stocks and the Nasdaq 100 index that is very heavily weighted in tech. So I’ll share my thoughts on the Nasdaq, while also running through the week’s economic calendar.

Now if history is any guide based on a Nasdaq weekly chart, we are approaching a buying opportunity. Why? Because a decline of 2-4 weeks has generally been an opportunity to buy a dip in a long term uptrend. BUT - there is always a but - 12,700 was possibly the neckline of a head and shoulder top pattern on the daily chart - and it has been breached, suggesting the correction lower could have further to go.

OK let’s switch gears to the economic calendar briefly. We have trade balance and foreign exchange reserves data from China sometime on Sunday through Monday followed by German industrial production and a speech from Bank of England Governor Andrew Bailey. Late Tuesday or early Wednesday depending on where you are in the world, there is a speech from RBA Governor Lowe. Wednesday also sees inflation data from China and the US - arguably the most important data of the week given the rise in bond yields. Then the Bank of Canada rate decision comes after. Thursday is the ECB meeting. Then Friday there is German inflation data and Canada unemployment. 

So last week was another rough week for high-flying tech stocks and the reason pretty much comes down to the rise in government bond yields. We talked about the British pound last week as a possible beneficiary of the rise in bond yields. Now we’re looking at the flipside of the coin and an area of the market that is getting unstuck by rising bond yields - tech stocks.

It comes down to how you value a company and the importance of interest rates in that equation. If we really go back to basics here - a stock gets its ‘fair value’ from the projected future cash flows from the company, discounted to the present using the investor’s required rate of return. I know, that was a mouthful - but here’s the important bit.

The ‘required rate of return’ is a combination of two things. One- the risk-free rate of return from buying government bonds and two, some extra amount (normally about 5%) to make it worthwhile taking the extra risk of buying a stock. If yields start rising, the stock price will need to drop to offer the investor the possibility of getting the ‘returns they require’ to make investing in the risker stock more worthwhile than investing in the risk-free government bond.

Tech stocks are some of the most richly valued companies with price to earnings ratios sometimes in the hundreds, when over twenty has always been the rule of thumb for what is considered overvalued. It’s not that tech companies are likely to see worse financial results going forward - in fact, most analysts expect healthy earnings growth. It is simply that higher interest rates should affect tech stocks and the Nasdaq index the most due to valuations.

Right thanks everyone, good luck trading this week and make sure to subscribe so you don’t miss the next episode of the week ahead.