The Nasdaq Composite made a rather unusual move during Monday's rebound, leading some analysts to advise caution regarding the stock market's nascent recovery this week.
Despite rising by 1.6% on Monday, marking its strongest performance since July 28, the Nasdaq Exchange's advance-decline line continued to deteriorate. This line measures the number of stocks on the exchange that closed higher versus those that closed lower. According to data from Bloomberg cited by BTIG's Jonathan Krinsky, the exchange's advance-decline line stood at a negative 175 on Monday.
It is uncommon for the Nasdaq to experience such significant gains while the majority of its components falter, even in a year like 2023 when a handful of mega-cap technology stocks have garnered substantial attention in the financial press for their outsized contributions to the overall gains of both the S&P 500 and Nasdaq.
In fact, the impressive gains from these stocks, often referred to as the "Magnificent Seven," led to the Nasdaq rebalancing its most popular index, the Nasdaq 100, in an effort to reduce its reliance on just a few mega-cap stocks.
Related: Key Changes to the Nasdaq 100 Following Monday's Special Rebalancing
This group consists of Tesla Inc. (TSLA), Nvidia Corp. (NVDA), Meta Platforms Inc. (META), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), and Alphabet Inc.'s Class A (GOOGL) and Class C (GOOG) shares.
According to Krinsky's analysis, there have been only nine other instances since the start of 2007 when the Nasdaq Composite recorded a gain of 1.3% despite a greater number of declining stocks compared to those advancing. He includes these instances in the chart provided.
The subsequent 30-day returns for the Nasdaq following these occurrences have shown mixed results. However, in the most recent examples prior to Monday, the index was lower 30 days later in three out of four instances. Notably, following an example on March 28, 2022, the index proceeded to decline by 18.2% over the following 30 days. Conversely, after an example on May 25, 2023, the index gained 8.4% during the subsequent 30 days.
Krinsky illustrates these historical moves in the charts below.
What Can Investors Learn from Recent Gains?
The recent advance of the Nasdaq can be attributed to strong gains in a select few stocks. Nvidia, for instance, experienced its biggest gain since May 25, with a growth of 8.5%. This surge followed their impressive earnings report from the previous quarter, resulting in one of the largest increases in market capitalization ever seen in modern U.S. financial markets.
Tesla Inc. also saw a significant increase, with a daily gain of 7.3% – their best performance since March 21. Additionally, other members of this group, such as Apple and Microsoft, also experienced notable gains despite the overall weakness observed in the market over the past month.
According to experts, the rise in Nvidia and Tesla stocks can be attributed to traders frontrunning Nvidia's upcoming quarterly earnings report. This report is scheduled to be released on Wednesday after the market closes. By strategically investing in these stocks, traders were able to counteract the impact of rising Treasury yields, which would otherwise have had a more significant negative effect on the overall stock market.
While the enthusiasm surrounding these stock gains is noteworthy, it is worth highlighting that an increase in 10-year Treasury yields should typically dampen this sentiment. However, this was not the case due to the successful performance of Nvidia and other stocks in the "Magnificent Seven" group.
It is important to note that the 10-year Treasury note's yield experienced a significant jump on Monday, reaching 4.339% – its highest level since November 6, 2007. This increase signals a decline in bond prices since yields and prices move inversely.
As of recent trading, the yield on the 10-year note has slightly decreased, while both the S&P 500 and Nasdaq have shown modest gains. The S&P 500 is up 0.1% at 4,402, while the Nasdaq Composite has risen by 0.4% to reach 13,546. On the other hand, the Dow Jones Industrial Average has experienced a slight decline of 85 points or 0.3% to settle at 34,377.
Significantly, both the S&P 500 and Nasdaq have endured three consecutive weeks of decline – a streak that has not been seen for the Nasdaq since December.
In conclusion, recent market trends reveal valuable insights for investors. The exceptional performance of select stocks, such as Nvidia and Tesla, has counteracted the negative impact of rising Treasury yields. However, caution should still be exercised as the market remains vulnerable to potential fluctuations.
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