Nasdaq's chart sends a warning signal, but analysts see opportunity in the breakdown

Published Mon, Jan 10 20222:28 PM EST

The Nasdaq Composite flashed a classic warning signal Monday, but chart analysts still see some opportunity in technology stocks. The tech-heavy index on Monday fell below its 200-day moving average for the first time since April 2020 before coming off its lows later in the session. As of Friday, the Nasdaq Composite has closed above its 200-day moving average for 434-straight trading days, the third-longest streak in history, according to Bespoke Investment. The 200-day metric is considered a measure of the long-term trend. When an asset breaks and stays below the 200-day moving average, it could signal to investors the end of an uptrend. The warning signal in the Nasdaq Composite indicates a repricing of high-growth stocks, according to Jeff Kilburg, chief investment officer for Sanctuary Wealth. "In technology, we are certainly seeing an overreaction. We're seeing profit-taking. We're also seeing anxiety," Kilburg said. The sell-off in tech names comes as interest rates rise with the yield on the benchmark 10-year Treasury note sharply higher than where it closed 2021. The Federal Reserve is tapering its bond purchases and is set to hike interest rates after the taper concludes. The central bank also indicated in its December meeting a plan to reduce its balance sheet in another move to dial back its pandemic-era easy monetary policy. High-growth shares trade on the promise of big earnings growth in the future. Rising rates make their future potential cash flows less valuable and can hurt the valuation of tech stocks. "The Nasdaq is littered with names that we deem as concept capital, which are names that are far more susceptible to higher rates in a more normalized liquidity environment," said Jeff deGraaf, founder and chairman of Renaissance Macro Research. "I think what you're going to end up with is a very frustrating year in 2022 for growth-oriented investors that are trafficking in names that are more about the narrative than the underlying businesses." However, the Nasdaq Composite's drop below the 200-day moving average does not mean investors should give up on tech completely, according to Kilburg. "You can't paint all tech with a broad swath and sell everything," Kilburg said. The Nasdaq 100, which comprises the equities of the 100 largest non-financial companies on the Nasdaq market, did not cross its 200-day moving average. That signals the sell-off in tech has been concentrated more in small-cap names, said Ari Wald, head of technical analysis at Oppenheimer. "We would stay on the quality side. I think you want to respect the breakdown in small caps," Wald said. All three analysts pointed to semiconductors as a bright spot in the tech space that could be a buying opportunity for investors. They see continued volatility and rerating for technology shares through 2022, with Fed policy as a major driver of direction for market leadership. "I don't think it's a bear market. I think it's premature for that. But I do think that there's this huge reset and I don't think that is done," deGraaf said. —CNBC's Nate Rattner, Fred Imbert and Michael Bloom contributed to this report.

A trader works on the floor of the New York Stock Exchange (NYSE) on December 13, 2021 in New York City.

Spencer Platt | Getty Images

The Nasdaq Composite flashed a classic warning signal Monday, but chart analysts still see some opportunity in technology stocks.