Keep a watch buy on Dips
Technology stocks have higher sensitivity towards interest rates (which one proxy is the 10-year treasury yield). The higher the treasury yield, the more tech stocks will decline. Here’s a chart showing the relationship between 10 =year yield (x-axis) vs index level of S&P500 (which represents the broader market) and Nasdaq (tech stocks). Notice how Nasdaq has a steeper decline as treasury yield goes up.
Note: chart was made in Q1 2021. Read more here when i wrote about it in our newsletter.
Right now 10-year treasury has gone up to 1.5%. The problem is, we cannot know if the increase is temporary or permanent. Early in the year, it went up to 1.5% too - but subsequently went down. So, buying the dip then was a good idea.
I’ve seen this correlation as well,
however, while the covid is not yet gone or subsided at a vast level - I’m wondering about how the fed tapering, yields going up, countries taking more debt, would affect all sectors. (i.e what’s that unexpected which can stop our music for a while)
Not sure if the solution to raise the bar limit of economic debt would keep things intact in stock market; raising economic debt is another vicious cycle with inflation.
Will Robert Kiyosaki’s suspicion for crash based on too much debt - go true?
I feel, I need more insights from other experts of finance as well to think about the long run.
We’re already seeing some economic trade offs (in short term), where indices are responding to the govt policies/investments being brought in. (commenting in general)
P.s: maybe this reply of mine would need a different section for discussion completely.
The US 10yr is currently at 1.687. Still lower than 1.74 in March, which resulted in a 10.5% retracement in Nasdaq and more in emerging tech stocks, which Ray Dalio termed as frothy, just before they crashed. The ARK ETFs, were on the front line of this occurance. Since then, Nasdaq has risen 26%.
The rates are definitely inching higher, but we all know that it’s a temporary phenomena and that, after a dip, which is a great buying opportunity, Nasdaq will scale newer highs.
So if you are in for the long term, =>10% retracements are a great buying opportunity, even though in the short term one could book profits and buy lower as well, but I prefer to buy more of a good stock when it dips rather than sell it. Maybe that’s just me.
The old saying is that, if it’s a good stock to buy at $100, you should be more willing to buy it at $80. But overcoming the fear of catching a falling knife is really hard.
If truly inflation stays and interest rates go up (which is now increasingly likely since wages are going up, and once wages go up - it’s hard to reverse) - undoubtedly Nasdaq will decline. But not all companies in Nasdaq will suffer equally. It is very likely the SPACs or the companies w/o healthy free cash flow will suffer the most. As for the more mature (that are astoundingly still growing fast) tech companies (e.g. MSFT or AAPL), they have so much cash, they will likely buyback shares + return via dividend.
Note: Opinions are my own. Not investment advice.