This year’s searing Big Tech rally shows signs of overheating, with at least one technical measure suggesting a pullback might be around the corner. The stock surges at major technology firms, including Microsoft Corp., Alphabet Inc., Inc., Nvidia Corp. and Meta Platforms Inc. They have propelled their relative strength index, a 0-100 gauge of bullish and bearish price momentum, above 70 in recent days.

Such an elevated RSI level is generally considered a contrarian signal that a decline is imminent, because buying has gotten excessive.

On Thursday, the Nasdaq 100 Index, home to those tech heavyweights, also entered so-called overbought territory for the first time since February. The benchmark edged higher, up 0.1% on Friday.


Gurmit Kapoor, cross-asset sales trader at Aurel in London has been bullish on the tech-heavy index for some time, but now reckons the broader Wall Street benchmark might be a better bet.

“Now may be a good time to switch to long S&P 500 outright or versus the Nasdaq 100,” Kapoor said.

“There may still be little upside or performance in the Nasdaq 100 given its momentum, some FOMO and the AI ​​buzz, but eventually a long S&P 500/short Nasdaq 100 trade will gather attention.”

Here are three more charts summarizing the headwinds for Big Tech’s rally:

Call Volume Frenzy on Nasdaq 100

Buzz around artificial intelligence (AI) is arguably the biggest driver behind large bullish bets on the Nasdaq 100, where call volumes have hit their highest level since 2014. These are essentially contracts that allow holders to buy the underlying stock.

Tech bulls have also received impetus from the likely end of the Federal Reserve’s rate-hike cycle, companies’ hefty cost-cutting efforts and signs of a positive outcome in US debt-ceiling deadlock, thus averting a catastrophic default.


S&P 500 Poised for Comeback

This year’s tech rally has lifted Apple, Microsoft, Alphabet and Amazon at least 30% and doubled the value of Nvidia and Meta. That’s given a 26% boost to the Nasdaq 100, almost three times the S&P 500’s gain.

Based on the relative strength index, the ratio between the S&P 500 and the Nasdaq is now heavily oversold. It is also approaching a seven-year downtrend line, off which it bounced last year. The S&P 500 meanwhile appears to be on the cusp of a breakout, having closed Thursday at its highest level since last August.


Stretched values

The market moves have triggered a sharp valuation re-rating, lifting the Nasdaq 100’s forward P/E ratio to the highest in a year. This surge is increasingly at odds with how inflation-protected bonds are trading — unusually for the tech sectors, valuations until now have shrugged off higher “real yields.”

UBS Wealth Management CIO Mark Haefele said the first-quarter tech earnings decline had been shallower than expected but the sector is, nonetheless, his least preferred. Global tech stocks now trade at more than 23 times 12-month forward earnings, he noted, a 32% premium to their 20-year average.

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