That number normally points to a bear market, according to Ned Davis Research. So the Nasdaq index as a whole could be in trouble.
As a whole, the technology stock drop of recent weeks doesn’t look too bad, with the Nasdaq Composite index down 9% from its November record high.
But if you look beyond that number, 36% of the stocks in the index have plunged at least 50% from their 52-week highs, according to Ned Davis Research, as cited by Bloomberg. And the implications for the market aren’t pretty — possibly a bear market.
Historically, when the Nasdaq stands within 10% of its all-time peak, only 12.5% of its stocks have tumbled that much on average.
The difference this time around is that the Nasdaq’s biggest stocks are holding up reasonably well. And those companies have an outsized impact on the index, given that it’s market-capitalization-weighted.
Among the biggest Nasdaq stocks, Apple (AAPL) – Get Apple Inc. Report has fallen 6% from its 52-week high, Alphabet (GOOGL) – Get Alphabet Inc. Class A Report 8%, Microsoft (MSFT) – Get Microsoft Corporation Report 12%, Meta Platforms (MVRS) – Get Meta Report 14%, Amazon (AMZN) – Get Amazon.com, Inc. Report 15% and Tesla (TSLA) – Get Tesla Inc Report 17%. Those companies have seen strong earnings throughout the pandemic.
The rise of interest rates that has hurt all tech stocks may be affecting smaller ones the most, Bloomberg notes. The smaller companies generally have a greater need to borrow money than their larger brethren.
And the smaller companies are obviously riskier than large ones, which becomes an issue as rising interest rates make safe investments, such as Treasury bonds, more attractive.
The rout among smaller Nasdaq stocks could signal trouble ahead.
The number of stocks in the index that have lost at least 50% normally would indicate a “cyclical bear market,” or a drop of at least 20% from record highs for a few months, according to Ned Davis. But it’s a tough call now, the firm told Bloomberg.
