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After two months of no record, the Nasdaq Composite sags toward a correction.

Rising yields and concerns that earnings growth will slow dealt another blow to tech stocks, pushing the Nasdaq Composite Index to the verge of a correction.

The tech-heavy index fell 2.6 percent on Tuesday, bringing the drop from the November 19 high to 9.7 percent. The two-month dry spell is the longest since April 20, 2021. Along the way, the gauge gave up a critical technical level, the average price over the previous 200 days, for the first time since the aftermath of the pandemic bear market in 2020.

While the Nasdaq has experienced worse drawdowns in the last two years, what distinguishes this one is its duration. It’s already more than twice as long as the previous two corrections, at 60 days. Unlike previous retrenchments, where dip buyers flocked in, investors are hesitant to return this time due to speculation that the Federal Reserve will have to raise interest rates sooner to combat inflation.

“The hot wage data from the banks has the market even more concerned about inflation, and thus the likely path of Fed tightening,” said Steve Chiavarone, portfolio manager and head of multi-asset solutions at Federated Hermes. “Tech requires lower inflation and the Fed’s ability to move at a slower pace.” Otherwise, growth could be jeopardised. This has been our request.”

Bond yields’ drag on the Nasdaq 100, a measure that tracks tech heavyweights, is exemplified by their relationship. The one-month correlation between the equity index and changes in the 10-year real yield was negative 0.5, according to Morgan Stanley strategists led by Mike Wilson, one of the lowest readings in the post-pandemic era.

The reporting season, which has just begun, has the potential to break the elevated linkage, though earnings momentum isn’t helping the Nasdaq either. As the economic recovery broadens, the growth advantage that tech firms once had is eroding.

“You could say that Nasdaq growth stocks have been like the cool kid who gets to break all the rules and no one notices, but Principal Powell is finally ready to put him in detention,” said Max Gokhman, chief investment officer at AlphaTrAI. “Meanwhile, the boring kid everyone keeps writing off, aka value, has been quietly getting stronger, and now investors realize his steady cash flows and stable growth rates, unlike Nasdaq’s bombastic promises, can be relied on.”

Those software and internet companies have yet to make a profit-led Tuesday’s slump once again. A Morgan Stanley index of profitless technology companies fell 4.2 percent, extending its loss from a November peak to more than 40%.

While volatility hasn’t yet reached November highs, the CBOE NDX Volatility Index has now closed above 25 for two weeks in a row, a streak seen only once in the previous nine months.

Such turmoil is discouraging investors, who are increasingly avoiding risk. According to Bloomberg factor performance, volatility is the worst-performing factor this year, with a strategy of buying the most volatile stocks against the most dormant sinking more than 9%.

Everyone, from long-only funds to speculative investors, is suddenly exciting tech stocks. According to the most recent Bank of America Corp. survey of global fund managers, net allocation to the technology sector has dropped to its lowest level since the 2008 global financial crisis.

Previous support that had consistently enticed buyers has ceased to exist. The Nasdaq Composite has just completed a 439-day streak above its 200-day average, the third-longest run in history.

With real yields as low as they are, a case could be made that the Nasdaq 100’s tech stocks have risen too much relative to their levels, according to Steve Sosnick, the chief strategist at Interactive Brokers LLC. In other words, the momentum of tech stocks had gotten so far ahead of what could be justified by low rates that he warned that even if the bond market stabilized, more pains could be ahead.

The Nasdaq 100 has risen 201 percent in the last five years, nearly doubling the S& P 500’s gain.

“That implied that NDX was vulnerable even if rates remained unchanged, and even more so if real rates became less negative,” he explained in an interview. “And today’s real rates are less negative than they were on Friday.”

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Kathy Lewis

Kathy Lewis is an all-around geek who loves learning new stuff every day. With a background in computer science and a passion for writing, she loves writing for almost all the sections of Editorials99.

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