The NASDAQ Breakdown Playbook

By David Nelson, CFA CMT

It’s hard to believe that anything other than COVID-19 and the success or failure of the vaccine rollout could top the list of investor concerns. However, the recent rise in rates is #1 with a bullet.

It’s not the absolute level but the velocity of the move! At just over a 1.6% yield in the 10-year the 4.5% earnings yield in the S&P 500 still looks attractive. If rates were rising at a more measured pace, I suspect the recent damage to growth stocks would have been far more muted.

10-year It’s not the rate but the velocity of the move

Since the Pfizer announcement in early November that a vaccine had met its end point the procyclical rally has exploded higher trouncing large cap secular growth behemoths like the popular FAANG stocks. Growth is the most expensive when there isn’t any and with the economy opening up, we’re likely to see growth in sectors that have lagged in previous years including energy, financials, industrials and even materials.

Growth vs Value Rotation Wars

That dynamic has continued to suck money out of popular growth stocks and other what we call long duration equities, stocks that often acted as a substitute for fixed income because they offered steady cash flows regardless of where we were in the economic cycle.


Sector and asset class performance has acted as a road map or playbook for investors encouraging them to start looking at stocks that haven’t topped the list of investor favorites for years. The turnaround in the fossil fuel energy complex (XLE) up +39% YTD is even more surprising under a Biden Presidency that is focused on electric vehicles and other green energy investments. The Financial sector taking its cue off of the steepening yield curve comes in at #2 up a strong 14% since the start of the year.

Last week the above was brought to a head as the highest flyers accelerated their descent forcing the NASDAQ into negative territory YTD. Many of the top performers of 2020 are off more than 20% from recent highs. Even Cathie Wood’s popular ARK Innovation Fund (ARKK) has shed 23% in just two weeks.

Friday’s performance was encouraging rallying into the close, but the damage was done. The head & shoulders breakdown of the NASDAQ forced numerous sell programs last week. Given the size and velocity of the move lower a reversion to the mean could easily take place early in the week forcing shorts to cover but again all eyes will be on the long end of the yield curve. Monday’s open looks to be a continuation of the rotation. 

At 1.5% fixed income is still not competitive with stocks but each step higher will demand earnings estimates climb to keep pace. Right now that’s been a bright spot of the equity markets. We’ve seen estimates for the S&P 500 move North for the last several months as the stair step reopening of the economy takes place. The ability to normalize is largely a state by state dynamic.

Here in Connecticut the vaccine rollout has been impressive. I received my first Pfizer dose last week and was surprised by the precision of the military operation. The National Guard soldiers manning their posts directed a near flawless parade of cars including yours truly as we approached the medical technician who administered the vaccine in the car. 25 minutes from start to finish including a 15 minute wait period for any reactions.

Others haven’t been as lucky. Across the nation there appears to be bottlenecks both in getting online to register for the vaccine and long lines at the site some lasting hours.

The Senate has passed their version of a $1.9 Trillion package and now it goes back to the house for what looks like an easy vote before sending it to the President for signature. Stocks love money and have all but priced in the injection. Bond investors seem more concerned worried that the Fed’s hand will be forced as inflation continues to rise. Washington is  already talking about another round of stimulus. 

*At the time of this post some funds managed by Davie were long XLE & SPY