- The tech-heavy Nasdaq Composite index has outperformed for the reason that stock market’s slack-December promote-off, and one professional says that makes the community seriously at threat of any other downturn.
- Julian Emanuel — the chief equity and derivatives strategist at BTIG — explains why he’s worried about the Nasdaq and outlines how traders can protect themselves in opposition to sharp losses.
No home of the stock panorama has enjoyed a bigger restoration following December’s undergo-market fright than the tech-heavy Nasdaq Composite index.
Whereas the benchmark S&P 500 has climbed 20% since December 24, the Nasdaq has outdone it by surging bigger than 24%. Pondering tech has been a number of the prime contributors to the ten-twelve months bull market, the Nasdaq’s restoration suggests equities comprise reverted support to their prolonged-standing space quo.
No longer so fleet, says Julian Emanuel, the chief equity and derivatives strategist at BTIG. He thinks the Nasdaq — and, by extension, the tech sector — has gotten too stretched for its hold factual.
Emanuel components to the chart below, which shows a technical-analysis instrument known as the relative strength indicator. An RSI discovering out exceeding 70 potential the market is overbought and a downturn might well well additionally very properly be drawing shut and, as you are going to be in a space to take into memoir, the Nasdaq has been flirting with that level for a whereas.
Going beyond merely technical components, Emanuel will be worried by what he sees in the shut to-term macro panorama. For one, a producing slowdown mixed with Brexit has dragged German yields into adverse territory.
For the reason that Treasury yield curve is so carefully intertwined with its German counterpart, this doesn’t bode properly for the US economy as recession worries flare. And as these worries mount, that adverse sentiment will be a inch on equities. We skilled these dynamics on Friday, when US stocks tumbled.
Be taught extra: Overlook the yield curve. Morgan Stanley says traders desires to be centered on a superior recession brand — one which’s threatening to flash by twelve months-quit.
By Emanuel’s good judgment, the stocks that comprise risen the most since most unique lows even comprise the furthest to drop. That brings him to his bearish outlook for the Nasdaq, which he says might well well additionally fall as far as 6,600. Pondering the index closed at 7,691.52 on Tuesday, that is susceptible to be a14% decline— enough to qualify as a dreaded market correction.
“Given overbought readings, it is no longer going that the US equity market can dwell fair of Europe,” Emanuel said in a most unique client reveal.
So what are traders to discontinue? Emanuel advises them to name the Nasdaq stocks that comprise gotten the most egregiously stretched after which put some recoil hedges in map. He calls this seriously susceptible community the “Falling Angels,” and it is listed in paunchy below.
Sooner than we salvage to that, however, Emanuel has two single-stock trades he’s recommending in particular:
- Intuitive Surgical (ISRG), up 31% since December 24 — Buy Could $545 puts
- Workday ( WDAY), up TK% since December 24 — Buy Could $185 puts
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