Source: PaxForex Premium Analytics Portal, Fundamental Insight
The market has seen a resurgence this year, bouncing back from a bear market in 2022. While some are hesitant to officially declare it a bull market, the Nasdaq Composite has rebounded by more than 20% from its previous lows, which strongly suggests it may be reentering bull territory.
However, the question remains: Is it a wise decision to invest in the Nasdaq after this rapid increase in its value? The intuitive response leans towards "yes," as investors typically want to ride the wave when an index is on the upswing. On the contrary, a more contrarian perspective suggests taking a step back and evaluating whether it's a safe option at this moment.
The Nasdaq Composite, much like the Dow Jones Industrial Average or the S&P 500, provides insight into the market's performance, but each offers a different perspective. Notably, the Nasdaq is heavily skewed towards technology stocks, meaning its performance may not necessarily align with other market indicators. Last year, during a flight to safety prompted by surging inflation, all these indexes incurred losses. Notably, the Dow Jones, which has a significant number of safe, established stocks, performed the best, while the Nasdaq, known for its growth-oriented stocks, performed the worst.
This year, with investors regaining confidence in the strength of the economy, they are shifting back towards tech and growth stocks, reversing the previous trend.
NASDAQ, SPX, and DJI indices daily chart
An observation from the above charts reveals that the Nasdaq typically experiences more significant fluctuations than the overall market due to its composition of numerous growth stocks, which inherently carry more risk than established and value stocks.
This leads us to the theory behind why some investors might be cautious about participating in a rising Nasdaq market. The concern is that it might become overvalued, with stocks reaching unsustainable heights, potentially leading to a sharp correction in the opposite direction.
Looking at the average price-to-earnings ratio of the Nasdaq-100, a weighted index of the 100 largest Nasdaq stocks by market capitalization, it currently stands at 30. This is an increase from 23 just a year ago, which aligns with the index's 40% surge over the past year. Predictions from The Wall Street Journal indicate that this valuation is anticipated to decrease to 26 within the next 12 months. This projection could mean one of three things: stock prices will decline, earnings will increase, or a combination of both. It's important to note that this is merely an expectation, and there's no guarantee that it will materialize.
The Nasdaq Composite consists of approximately 2,500 stocks, which means it reflects an average performance across this vast array. While you might identify a particular stock with a more favorable combination of attributes, such as strong performance, appealing valuation, and growth potential, it's crucial to give heightened attention to valuation at this juncture. This is because there is a likelihood that some Nasdaq stocks are currently trading at overvalued levels.
If you're contemplating an investment in a Nasdaq Composite or Nasdaq-100 index fund or exchange-traded fund, it might be prudent to await a more favorable entry point. However, if your investment horizon is long-term, you should certainly consider this factor, but it becomes less of a pressing concern.
As long as the price is above 14425.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 14894.78
- Take Profit 1: 15500.00
- Take Profit 2: 15900.00
Alternative scenario:
If the level of 14425.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 14425.00
- Take Profit 1: 14000.00
- Take Profit 2: 13700.00
