We saw a startling rally on Monday, with major indices like the S&P 500 Index (SPX) and Nasdaq 100 Index (NDX) each rising well over 2%. As the week progressed, we saw those indices give back most if not all of those gains. It showed that sustainable gains – at least for now – may be elusive. That said, SPX seems much more resilient than NDX, which is facing key technical tests amidst a recent spate of volatility.

When we compare the recent performance of the two indices, we see that neither has done well over the past month, but SPX has been the outperformer. Over the past two weeks, during rallies its highs have been higher than those of NDX, while the latter index has made lower lows during its declines.

1 Month Chart of NDX (white) vs. SPX (blue)

Source: Bloomberg

The outperformance of SPX is also apparent in a year-to-date chart. NDX is essentially flat for the year, while SPX is up about 2%. Neither is stellar, but we can see that SPX appears to be in better technical shape than NDX. Both made new highs in mid-February, but while SPX retested those highs twice during recent rallies, NDX has not. NDX has shown a pattern of lower highs and lower lows, which can be worrisome for future performance.

Year-to-Date Chart of NDX (candles) vs. SPX (blue line)

Source: Bloomberg

All things considered, these short-term charts are not particularly worrisome. Flattish performance over a couple of months is nothing to be concerned about, and to be expected at various times in a normal market. But investors have not become accustomed to normal markets or flattish performance. Behind a rapidly growing Fed balance sheet and successive rounds of fiscal stimuli, investors have come to expect stellar results. The first test for NDX, along with SPX, is how investors will react if we see an extended period of sideways movement.

The more important test for NDX in the short term is whether the 100-day moving average can continue to provide support for the index as it has for much of the past year. The following chart illustrates how different moving averages have defined the trends for NDX over the past 2 years. Steeper rises are defined by shorter-term moving averages than more gradual rises. That is evident in the chart below:

2 Year Chart of NDX vs 50 Day (yellow), 100 Day (red), and 200 Day (green) Moving Averages

Source: Bloomberg

For good portions of 2019, we see that the 50 and 100-day averages more or less moved together for the early part of the year, while the 200-day average provided key support during dips. As a broad rally took root during the 4^th quarter of 2019 into the 1^st quarter of 2020, we see that NDX moved up at such a steep rate that it far outstripped all its long-term averages. That came to a grinding halt when Covid took root, and the exogenous shock to the market rendered all the prior moving averages irrelevant as support. Once the equity markets found their footing after the “shock and awe” supplied by twin stimuli, NDX began a fresh rally that outpaced the 50-day moving average from March until September. After peaking early that month, NDX’s 100-day moving average was successfully tested twice, once in late September and again in late October, before resuming an advance that outpaced the 50-day average once again.

We now find NDX testing the 100-day average once again. Unlike during the prior tests, we are facing rising bond yields that threaten the lofty valuations of the stocks that dominate the market capitalization weighting of NDX. This is why the current test of the 100-day moving average is so critical. The bond market is beginning to question the Fed’s resolve to maintain an accommodative monetary policy in the face of rising inflationary expectations, while at the same time there are questions whether the fiscal stimulus package that is working its way through Congress will be a “buy the rumor, sell the news” event. To be fair, every pullback is accompanied, if not caused by, heightened nervousness among investors. What makes me a bit more concerned this time is that the macro concerns revolve around the very tenets that drove asset prices higher over the past year.

You may ask “what happens if we break the support?”A common tenet of technical analysis is that resistance becomes support. That means that we would expect to find support at levels that proved hard to pierce earlier in the uptrend. I drew a white line at that level, which is around 12,300. If that line fails to hold, the outlook could be direr, since the 200-day average is around 11,650. Bear in mind that while that level would represent a significant pullback from the index’s highs, it would still be within range of prior highs and still be a significant advance over the pre-Covid peak.