Growth and technology stocks, as measured by the Nasdaq-100 index, have become more expensive and look poised for a possible decline over the next two weeks, according to Michael Kramer, founder of Mott Capital Management.
“The Nasdaq 100 needs to be priced lower to determine where the real returns are,” Kramer said in a telephone interview on Friday. Rising real returns, which are adjusted for inflation, are particularly damaging to valuations of technology and other growth stocks.
Real interest rates have risen recently, as seen by the decline in the iShares TIPS Bond ETF TIP,
Kramer said. Meanwhile, the earnings performance of Invesco QQQ Trust, a stock that tracks the Nasdaq-100 index, has declined, according to Kramer. This is indicated by the recent rise in shares of Invesco QQQ Trust QQQ,
Trading the two ETFs helps inform his bearish view of the market.
The recent rally in the Invesco QQQ Trust has diverged from the decline seen in the iShares TIPS Bond ETF, creating a widening gap that suggests the Nasdaq-100 could be headed lower over the next two weeks, Kramer explained. He highlighted this divergence in this chart below in his September 8 market commentary note.
“You have the TIP ETF making news low,” Kramer said.
The divergence from the Invesco QQQ Trust means the Nasdaq is getting more expensive, he said, adding that the Nasdaq tends to follow the moves made by the TIP ETF over the course of a few weeks. “What that means to me is that the Nasdaq is going to have to make a new low,” he said.
Kramer said he is bearish on the stock market for a while and expects the S&P 500 SPX,
to fall below the June 16 low. He said the index could fall to around 3,200 points in the next six months as the Federal Reserve continues to tighten monetary policy.
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U.S. stocks traded sharply higher on Friday afternoon, with the S&P 500 up 1.7% to about 4,073, according to FactSet data at last check. The blue-chip Dow Jones Industrial Average DJIA gauge,
traded 1.4% higher, while the tech-heavy Nasdaq Composite COMP,
jumped 2.2% in afternoon trading on Friday.
But stocks and bonds have fallen so far this year as the Fed raises interest rates to fight high inflation.
“The Fed wants economic conditions to tighten to reduce inflation,” Kramer said. “You can’t have stock values going up and economic conditions tightening.”
Shares of the iShares TIPS Bond ETF, which tracks an index of inflation-protected U.S. Treasuries, have fallen about 14% this year through Sept. 8, with the fund losing nearly 9% on a total return basis, according to with FactSet data. The Invesco QQQ Trust took a steeper plunge this year, losing about 24% over the same period, the data showed.