After a round of intense selling, the NASDAQ 100 index formed a hammer reversal candlestick at the intersection of a key trend support level and the 100-day moving average, where bulls and bears engaged in a decisive battle. Holding this position could trigger a strong short squeeze, while a breakdown could lead to a rapid deterioration of the market. The forward price-earnings ratio of this index has returned to the lowest valuation since the start of the 2023 AI market trend. As positions continue to be liquidated and we enter the earnings season, earnings may become the key factor supporting valuations.
The financial market analysis platform The Market Ear believes that the NASDAQ 100 index (NDX) is undergoing a dual test of technology and fundamentals. After a round of sharp selling, the index formed a hammer reversal candlestick at the intersection of key trend support levels and the 100-day moving average, where bulls and bears are engaged in a decisive battle. If this level can be held, it may trigger a strong short squeeze market; if it breaks down, the market could deteriorate rapidly.
During trading on this Thursday, the trading volumes of related assets for the semiconductor industry fund VanEck Sem tokens nductor ETF ( SMH ) and the memory industry fund Roundhill Memory ETF ( DRAM ) surged to recent peaks. Long-short hedge funds suffered heavy losses, with global systematic long-short strategies declining by 1.4% in a single day, approaching extreme volatility of four standard deviations. At the same time, the credit default swap ( CDS ) spreads for tech stocks continued to widen, and the pressure signals from the credit market and the stock market converged unusually.
Currently, the forward P/E ratio of NDX has fallen back to around 21 times, returning to the low point of valuation since the start of AI's market trend in 2023. Analysts point out that as positions continue to be liquidated, earnings may become the key factor supporting valuation after the earnings reporting season begins.
Key support level: Hammer candlestick pattern resonates with moving average
According to The Market Ear, on Thursday, NDX futures formed a large hammer-shaped K-line above the upward trend line that has been maintained since the April lows, and the 100-day moving average also provided support in the same area, making this position the core battleground of the current market.
Technical logic is clear: if multiple parties can hold this area, the short positions that have been severely hit before will face the pressure to be forced to cover their losses, and the potential force of a short squeeze cannot be underestimated; conversely, once the support is breached, the market structure lacking effective absorption will cause the decline to accelerate rapidly.
Credit and Stocks: Pressure Signals Finally Synchronize
A noteworthy change in this round of declines in tech stocks is that the signals from the credit market and the stock market have finally become consistent. Previously, there was a significant spike in the spread of tech stocks CDS, but at that time, NDX not only did not fall but also rose, leaving market participants puzzled.
During this round of adjustments, the widening credit spread occurred simultaneously with the decline in tech stocks, and for the first time, the two markets "began to speak the same language." The implied volatility indicator for tech stocks, VXN, also rose, approaching its September high. However, on a longer-term perspective, volatility has remained within a range over the past two months, with no clear trend-breaking yet observed.
Semiconductor trading volume surges: Stop-loss liquidation or take further risks?
During the selling pressure this Thursday, there was an abnormal increase in trading volume for popular assets.
On that day, both the semiconductor industry ETF SMH and the memory industry ETF DRAM recorded their highest single-day trading volumes in recent times. Subsequently, buying orders entered the market, leading to a temporary stabilization of the market.
The head of the trading desk at Goldman Sachs, Rich Privorotsky, pointed out that the long and short position books are actively reducing the total exposure (de-grossing). Some of the trading volumes may reflect passive stop-loss liquidations rather than an active change in fundamental judgment. Global systematic long-short strategies fell by 1.4% yesterday, marking an extreme one-day performance close to four standard deviations. The core of the losses is no longer the direction of net exposure, but rather the scale of total exposure – while long positions faced strong short squeezes, short positions also encountered equally intense forced selling, showing clear characteristics of two-way damage.
AI Capital expenditure: demand is solid, but structural contradictions remain unresolved
Privorotsky holds a cautiously optimistic attitude towards the short-term prospects of the semiconductor sector, believing that the part of the AI complex with the highest leverage has shown a clear rebound from yesterday's lows. The panic sentiment at the credit level may have been overpriced in the short term, and this could represent a temporary bottom.
He proposed a potential relative value trading strategy: short-selling ultra-large cloud service providers ( hyperscalers ) while going long on semiconductors.
However, structural contradictions still exist. Privorotsky points out that excessive capital is chasing a limited number of computing power infrastructures that are ready for electricity use. The process of readjusting prices is far from over; it may evolve gradually or erupt in the form of severe misalignment, and then spread to broader markets.
A noteworthy paradox is that despite the accelerated depreciation of technology, the spot computing power rental prices for B200, H200, H100, and even the older model A100 remain strong. This indicates that the financing side of AI is under pressure, yet the actual supply of computing power is still scarce, and the competitive advantages of existing infrastructure holders are unlikely to be shaken in the short term.
Yields falling is no longer a talisman for tech stocks.
Since September, NDX has shown a rare synchronous movement with the yield of 10-year U.S. Treasury bonds – tech stocks have risen and fallen in tandem with bond yields, breaking the traditional narrative that lower interest rates are beneficial for high-valued growth stocks.
This correlation indicates that the core variables currently driving market pricing are growth expectations and risk appetite, rather than the discount rate itself. In other words, if yields decline due to concerns about growth, it is not a positive sign for tech stocks.
What the market is more concerned about at present is the slowdown in growth, rather than interest rate levels.
Valuation bottoming out: The earnings season may become a catalyst for a turnaround
The forward P/E ratio of NDX has fallen back to around 21 times, once again reaching the valuation low point since the start of AI's market trend in 2023.
Goldman Sachs' Global Banking and Markets Department's US industry expert Peter Callahan pointed out that this level, or the technical pattern of a double bottom, provides a relatively favorable valuation basis for the upcoming earnings season.
Against the backdrop of continuous liquidation of positions and increasingly extreme market sentiment, the actual performance of companies in terms of profitability will become the key factor determining the direction of the market. If corporate profits meet expectations, there may be room for a recovery in valuations; conversely, if fundamentals continue to deteriorate, it will be difficult to avoid a breakdown of the current technical support levels.
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