Rare Resurgence in the Nasdaq 100 By Michael Salvatore, Editor, TradeSmith Daily - Our call for a short-term "leverage event" proved true...
- Tech stock health is rapidly improving...
- Forward returns are strong, but mixed after this rare event...
- Here's the top tech names to own (and to avoid)...
- "T-bill and chill" faces a reckoning...
- How our top growth specialist is preparing his readers...
We called the early August move a "leverage event" a few weeks back... And that's proving to be the right call. Stocks have broadly recovered in swift fashion, as the infamous "yen carry trade" has all but fully unwound.
We're back to "business as usual" for this bull market.
Although, it's worth noting, the major indices are hardly in lockstep right now...
The Dow Jones Industrial Average just set a new all-time high, the last one being in mid-July. The S&P 500 is still down about 0.7% from its all-timer and hit a snag during Monday's trading action.
Tech stocks, especially, are showing some unusual weakness. The Nasdaq 100 is still down about 5% from the all-time high set on July 10. Even the beaten-down old Russell 2000 is in better shape, down about 4% from its 52-week high, after getting a boost from the Fed's victory speech.
Let's focus on tech. Because while prices haven't recovered to the July highs, something else has. And at a pace that doesn't happen too often. The Nasdaq 100 components saw a rare resurgence... When you look at any market rally in an index, you should really be looking at the index's breadth.
Breadth measures essentially tell you how many stocks in any given index are trading with bullish technical patterns. One key measure is the 50-day moving average. The more stocks trading above that average, the better the breadth.
Here's a chart of how that currently looks for the Nasdaq 100: 
Right now, about 56% of the Nasdaq 100 stocks are trading above the 50-day MA. That's roughly average. But what I want you to pay attention to is the Rate of Change (ROC) indicator at the bottom.
Nasdaq 100 breadth has improved at one of the fastest rates all year long. In fact, it's doubled over the last two weeks (or 10 trading days, making for a 10-day ROC). That green line you see is at 99 – whenever blue ROC bars pass the green line, breadth doubled over the previous two weeks.
This rate of breadth improvement is relatively rare. Over the past 25 years, it's happened about 85 times, or 3.4 times per year, on average.
I wanted to dig deep into this datapoint and see what it could tell us about the market going forward one month... Given that we're about to enter what's historically one of the worst months for the stock market.
60% of the time, stocks are positive one month after this rare signal. So, the bulls have an edge during this rough patch – interesting on its own.
But what really stood out to me was the average returns. When stocks go up the month after this signal, they go up 5.3% – an exceptionally large move for a relatively short period. The downside is even bigger – an average fall of 5.8%.
We can expect a big move in the tech sector in the next month – whether it's up or down.
And naturally, you can make the most of that move by diving even deeper... I wanted to see which stocks did the best after this signal... Focusing on individual names helps a lot with this exercise. Certain stocks have extremely high win rates after rapid breadth improvements in the overall index.
Here's the top five Nasdaq 100 stocks by win rate and average returns (counting wins and losses)... - Arm Holdings (ARM): win rate of 83.3%, average 1M return of 8.9%
- CDW Corp. (CDW): win rate of 77.8%, average 1M return of 5.5%
- Super Micro Computer (SMCI): win rate of 74.5%, average 1M return of 11.1%
- Kraft Heinz (KHC): win rate of 73.9%, average 1M return of 3.8%
- Constellation Energy (CEG): win rate of 71.7%, average 1M return of 8.7%
(Disclosure, I own SMCI at time of writing.)
These stocks are anomalies after the rare breadth thrust. While the benchmark itself could go either way, these stocks have very high win rates and large average returns.
Naturally, we should also look at the bottom of this list... Here are the worst five Nasdaq 100 stocks to own after a strong breadth signal: - Airbnb (ABNB): win rate of 41.7%, average 1M return of -4.1%
- GlobalFoundries (GFS): win rate of 45.6%, average 1M return of -5.1%
- Warner Bros. Discovery (WBD): win rate of 50.7%, average 1M return of -0.3%
- Vertex Pharmaceuticals (VRTX): win rate of 50.93%, average 1M return of 1.5%
- Regeneron Pharmaceuticals (REGN): win rate of 51.7%, average 1M return of 0.48%
All of these stocks have a win rate worse than the Nasdaq 100 benchmark (60%)... and either negative or flat average returns. That makes these either stocks to avoid over the next month... or targets for put option trades. The "T-bill and chill" trade has met its end... If you're anything like me, you may have gotten an email in the past week letting you know you're getting a slightly lower interest rate in your savings account.
That's the first sign that the high risk-free return era is finally meeting its end.
And Treasury bills are, essentially, where high-yield savings accounts are putting your money. They take the spread between these short-duration bills and what you see in your account. So, take a look at this chart of a few key T-bill yields since the start of 2024: 
While the shorter-duration bills aren't facing nearly as much pain, the 1-year bill fell off a cliff on the early August volatility and hasn't recovered.
The downturn hasn't made a big impact yet. Folks are still happy to hang out in cash, with money-market accounts continuing to enjoy an all-time high in balances (that's $6.4 trillion).
And to be sure, it will take a while (and quite a few rate cuts) to change that trend. But for every basis point drop in these risk-free assets, the appetite for risk will inevitably grow. That's been a big thesis for our growth stock expert, Jason Bodner... Jason's been watching money market account flows closely as a barometer for retail investor's penchant for risk.
And because they'll start to see gradually lower returns, he knows the laws of investing physics will come into play, especially if stocks keeps charging higher at the same time.
This combines well with Jason's observation about small-cap stocks. Smaller, less-capitalized firms struggle in high-interest-rate regimes. That's because companies in this class tend to depend on borrowing to fund operations and growth. And it hasn't been as expensive to do that since the turn of the century.
This results in a brilliant, simple, strategy. Load up on high-quality growth stocks now, which will benefit in two ways: from easier borrowing costs and an influx of potential trillions in cash still sitting on the sidelines.
Understand, this may turn out to be a multi-year trend. There's a bit of time to get positioned. But the clock truly just started ticking. What's one great way to get positioned? Jason has some ideas in his newest research presentation right here.
After Jason walks you through the philosophy that's led to this new Project Greenlight initiative, he'll share a stock that's right in the buy zone for his Quantum Edge system – and it's fairly small. At a market cap of $14 billion, that's less than 1% of Nvidia's size (for now). Yet Jason considers it a stealth play on the same investing theme that made Nvidia a superstar: artificial intelligence. Go here to watch now. To your health and wealth,  Michael Salvatore
Editor, TradeSmith | 
