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NASDAQ May Not See New Highs For A Very Long Time

By Michael KramerMarket OverviewMay 13, 2022 06:17AM ET
www.investing.com/analysis/nasdaq-may-not-see-new-highs-for-a-very-long-time-200624134
NASDAQ May Not See New Highs For A Very Long Time
By Michael Kramer   |  May 13, 2022 06:17AM ET
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This article was written exclusively for Investing.com

The NASDAQ 100 has fallen by nearly 30% in 2022, with no bottom in sight. The declines have come with good reason, primarily due to the Fed being on a path to raise rates multiple times in 2022 and 2023, which has resulted in a significant increase in interest rates and falling earnings estimates. 

Additionally, technical trends in the NASDAQ have been very weak and have shown very few signs of improvement thus far. Combining a weaker fundamental outlook and deteriorating technical trends helps explain the overall market weakness and why the all-time highs may not be seen for a very long time.  

Rising rates, such as on the 10-year TIPS, have sharply increased in 2022, which have helped to bring the PE ratio of the NASDAQ 100 lower, and as a result, pulled the value of the index down. This is due to rising rates hurting the earnings yield of the NASDAQ 100 and pulling them higher along the way. The earnings yield is the inverse of the PE ratio, so the higher the earnings yield rises, the lower the PE ratio will fall.  

NASDAQ Earning Yield
NASDAQ Earning Yield

Source: Bloomberg 

On top of rising rates, earnings estimates for the NASDAQ 100 have fallen dramatically since the start of 2022. In January, the NASDAQ 100 saw its earnings estimates climb to nearly $571 per share. Since then, earnings estimates have come down to $560, a drop of around 2%. It is not much in the grand scheme of things, but when PE multiples are falling, a decline in earnings estimates can lead to a lower valuation for the index.  

NASDAQ EPS
NASDAQ EPS

Source: Bloomberg

Declining earnings in the broader index level and a declining PE ratio are also reflected on the individual stock level, which appears to be evident in the number of new highs minus the number of new lows in the NASDAQ on a daily basis. The number of new lows has been outpacing the number of new highs for months now, showing no sign of slowing down. A cumulative view of the difference illustrates the very sharp drop since peaking in November. 

More importantly, this cumulative number of new highs minus new lows doesn't seem to have stopped falling yet. In the past, when this indicator stops falling, it happened around the same time that the NASDAQ 100 bottomed. 

NASDAQ New Highs New Lows
NASDAQ New Highs New Lows

The bright spot is that the percentage of stocks above their 200-day moving average in the NASDAQ has fallen to below 10%. Historically that is a low-level and rare reading. Over the last 20-years, it has only been below 10% a handful of other times, a sign of how depressed many stocks are.  

NASDAQ % Stocks Above 200 DMA
NASDAQ % Stocks Above 200 DMA

The biggest issue for the NASDAQ and where it goes from here will be how much higher rates rise and whether there is further downside to earnings estimates. This will be dependent on what the Fed plans to do and how high they want rates to go, and the potential impact higher rates will have on the economy. 

These are perilous times, and given the path the Fed is taking, it seems unlikely that the NASDAQ's PE ratio will return to its old highs anytime soon, which may mean the NASDAQ doesn’t see an all-time high again for a long time.  

 
NASDAQ May Not See New Highs For A Very Long Time
 

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NASDAQ May Not See New Highs For A Very Long Time

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Comments (23)
Ro B
Ro B May 15, 2022 6:46PM ET
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Im so happy to see Cramer, I mean Kramer made a headline "not ATH for a long time". ATH in 3 months. Inflation goes up, market drops. Inflation decreases- WHICH IT WILL this summer, market goes up. People priced in a recession- when it doesn't happen we will see ATH this summer. Bears chased a dream and got it, but they want more. Greed everywhere. Not just FA, TA shows it.
Erikke Evans
Erikke May 15, 2022 1:00AM ET
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recession is here. get used to it.
James Victorino
James Victorino May 14, 2022 7:00PM ET
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you mean stonks not only go up?
shek mendi
shek mendi May 14, 2022 1:46AM ET
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Markets are pricing in a very high probability of a very bad event playing out; if it doesn’t, some of those cyclical stocks will massively re-rate higher, and if it does happen they’ve already priced a lot of that in.
Mohd Izhar Muslim
Mohd Izhar Muslim May 13, 2022 4:21PM ET
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Thank you so👍
Timur Grets
Timur Grets May 13, 2022 2:17PM ET
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No information .. just blah blah . hey Michael we know the fed is raising rates and sinking the indices. do you get paid bengm to write this to us again in a big useless text?
Javier Alvarez
Javier Alvarez May 13, 2022 2:00PM ET
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Have you considered changing your name to Apocalyptus?
Chris James
Chris James May 13, 2022 1:11PM ET
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Hey man! Good job posting this lagging, now obvious 20:20 hindsight article…. Like a weatherman predicting it’s going to rain during the rain storm. What would have made this piece really valuable, would have been for you to have posted this sentiment back in November when the abundantly clear SELL signal was screaming…. But good job telling us what we already know, actually knew now, in hindsight, back in November…
Chris James
Chris James May 13, 2022 1:09PM ET
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Good job posting this lagging, now obvious 20:20 hindsight article…. Like a weatherman predicting it’s going to rain during the rain storm. What would have made this piece really valuable, would have been for you to have posted such sentiment back in November when the abundantly clear SELL signal was screaming…. But good job telling us what we already know, actually knew, in hindsight, back in November…
Chandru Samtani
Chandru Samtani May 13, 2022 12:19PM ET
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I think it is a bear market and its just pulling the novices and some over enthusiastic new investors to buy in at this time
 
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