Nasdaq Index Extremely Overbought
In our June monthly outlook, which we sent out last week, we noted that we expected a short-term market top around June 16th, give or take a day or two. From this predicted top, we assume there will be a market weakness over the last few weeks of June and into the first week of July. If this weakness occurs, it will be driven by a rotation out of the high-flying technology space and into all other market sectors. With the Nasdaq currently trading at such an extremely overbought level, a rotation into other sectors of the market should be viewed as a positive.
Since the bottom of the Great Financial Crisis in 2009, when the Nasdaq is this overbought, it typically leads to a short-term pullback for the index. To illustrate the overbought nature of the Nasdaq, we looked at the 22 times that index traded more than 8% higher than its 150-day moving average, , as represented by the Nasdaq exchange trade fund (QQQ). The table below shows that we typically experience a pullback of around -12% in the index over the following month when we see the Nasdaq get this extended; and some of these periods of weakness resulted from external market issues that affected the entire market, such as the famous ‘Flash Crash’ in May of 2010 or the ‘Covid Crash’ three years ago. Other periods of weakness were associated with traditional sector rotation within the market, which is what we are expecting to occur.
Outside of some unknown external event that would disrupt the market, any weakness seen at this time should be viewed as the market taking a breath from such a strong run over the last two months and broadening out healthily.