Growth and technology stocks, as measured by the Nasdaq-100 index, have gotten more expensive and appear poised for a potential fall in the next couple weeks, according to Michael Kramer, founder of Mott Capital Management.
“The Nasdaq 100 needs to reprice at lower levels to account for where real yields are,” Kramer said in a phone interview Friday. Rising real yields, which are adjusted for inflation, are particularly damaging to valuations of tech and other growth stocks.
Real rates have climbed recently, as indicated by the trading down of the iShares TIPS Bond ETF
said Kramer. Meanwhile, the earnings yield of the Invesco QQQ Trust, an exchange-traded fund tracking the Nasdaq-100 index, has come down, according to Kramer. That’s indicated by the recent rise in shares of Invesco QQQ Trust
Trading of the two ETFs help inform his bearish view of the market.
Invesco QQQ Trust’s recent climb has diverged from the decline seen in the iShares TIPS Bond ETF, creating a growing gap that suggests the Nasdaq-100 may be set to fall in the next couple weeks, Kramer explained. He highlighted that divergence in this chart below in his market commentary note on Sept. 8.
MOTT CAPITAL MANAGEMENT NOTE ON SEPT. 8, 2022
“You have the TIP ETF making news lows,” said Kramer.
The divergence with respect to the Invesco QQQ Trust means the Nasdaq is becoming more expensive, he said, adding that the Nasdaq tends to follow moves made by the TIP ETF within a few weeks. “What this is implying to me is that the Nasdaq should be making a new low,” he said.
Kramer said he’s been bearish on the stock market for a while and that he is expecting the S&P 500 index
to drop below its June 16 low. He said the index could tumble to around 3,200 in the next six months as the Federal Reserve continues tightening its monetary policy.
U.S. stocks were trading sharply higher Friday afternoon, with the S&P 500 up 1.7% at around 4,073, according to FactSet data, at last check. The blue-chip gauge Dow Jones Industrial Average
was trading 1.4% higher, while the tech-heavy Nasdaq Composite
was showing a jump of 2.2% in Friday afternoon trading.
But stocks and bonds have slumped so far this year as the Fed hikes interest rates to combat high inflation.
“The Fed wants financial conditions to tighten to bring inflation down,” said Kramer. “You can’t have equity values rising and financial conditions tightening.”
Shares of the iShares TIPS Bond ETF, which tracks an index of U.S. Treasury inflation-protected securities, have tumbled about 14% this year through Sept. 8, with the fund suffering a nearly 9% loss on a total return basis, according to FactSet data. The Invesco QQQ Trust has taken a steeper dive this year, posting a loss of around 24% over the same period, the data show.