Unpacking Tech’s Breakneck Rally

For a while, the stock market highs of February seemed like they would be wistful ancient history during the coronavirus-induced doldrums of March. But U.S. equities –including the Nasdaq-100 Index (NDX) – have been on a breakneck pace since those March bottoms. The NDX in particular has had a stellar week; two straight record closes (Tuesday and Wednesday) and an impressive 23% quarterly gain. But even as the NDX continues its blistering revival, there are numerous technical hurdles to overcome. Is the tech-rich index in the clear and headed for more upside, or will key areas on the chart put the rally on ice this summer?

During the NDX's mid-February highs, the +10% year-to-date (YTD) breakeven level was the tipping point before the coronavirus-induced panic led to the broad-market sell-off. In NDX's slow and steady climb back up to these levels, that round-number YTD level is coming into in play once more.

The NDX is no stranger to pivots or hesitations occurring at round-number YTD%'s in 2020. The lows it scraped in March coincide with the -20% YTD level. Then there was a hesitation/short-term pullback that occurred at the -10% YTD level later that month. And a month or so after that, the NDX chopped around its YTD breakeven level in April, before gathering itself and pushing higher.

So with one of these levels in play once more, where does the tech rally go from here? The Nasdaq-100 is the benchmark for the Invesco QQQ Trust ETF (QQQ), one of the top-traded securities on a daily basis. Digging into QQQ's options activity may offer a glimpse of what the NDX could do in the coming weeks. During the previous 10% plateau, QQQ's 50-day, all-equity, buy (to open) put/call volume ratio was in decline. Now, that ratio is on the rise, suggesting the latest rally is comprised of hedges, as opposed to what were possibly more speculative bets back in February. With plenty of global bank support out there – the European Central Bank's (ECB) 600 billion euro ($672 billion) Pandemic Emergency Purchase Programme (PEPP) expansion comes to mind -- there's reason to believe the sentiment ratio could surprise folks to the upside.

However, when narrowing the scope and looking at QQQ's 20-day put/call ratio, it's unclear whether it is flattening out at its highs, or advancing to new territory. What can be determined is the last time the buy-to-open put/call ratios were up in this range, it led to flattish QQQ price action. So perhaps the +10% YTD level won't lead to a sharp decline like it did in February, but instead could result in several weeks of range-bound trading, as it waits for the next global catalyst – possibly the next U.S.-China tension -- to strike.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, June 7.