Mad Hedge Technology Alerts!
In quite an unprecedented maneuver; the people who run the Nasdaq have chosen to water down the biggest tech components because a few companies are exerting too much power over the index.
In other words, the big fish have gotten so big that the index is adjusting their formula.
This speaks volumes about how great the top 7 tech stocks have performed in 2023.
They have taken off like a runaway train and haven’t looked back.
If this turns out to be a less-than-blockbuster earnings season and the market offers a pullback, it may be the last opportunity of the year to get into high quality tech stocks at a discount.
Selloffs from blue chip tech firms like Netflix (NFLX) signal that a short-term technical cooldown could be in the cards for tech stocks.
NFLX came back to earth, but I want to reiterate that it is more than healthy price action for this stock which started out the year at $300 per share.
The stock exploded to $480 per share and the post-earnings cooldown has found the stock in the $420 per share range.
There are a handful of blue chip tech stocks that I would regard this sort of price action as a mind-blowing opportunity.
Another reason for a short-term cooldown is the aforementioned reformulation of the Nasdaq index.
The tech-based index - Nasdaq 100 gets tracked by a slew of funds.
They include the Invesco QQQ Trust (QQQ), the world’s fifth-largest exchange-traded fund (ETF), according to Morningstar.
Nasdaq announced that the Nasdaq 100 index will undergo a "special rebalance" that will come into effect today.
The index is typically rebalanced each quarter, but outside of that, it can employ a special rebalance to address overconcentration in the index by redistributing the weights.
While the organizers have been mum on the technical about the rebalancing, the index's methodology says that it can be adjusted if companies with weightings that exceed 4.5% of the index together make up more than 48% of the index.
This technical maneuver underscores the attractiveness of these tech businesses and compelling investment opportunities relative to other areas.
The result has been increased investor attention and enthusiasm for tech stocks now — at the expense of other sectors, he says.
Investors of funds tracking the Nasdaq 100 Index woke up today with a different portfolio.
Most investors in U.S. stocks will be at least indirectly affected by the rebalance.
That's because "billions of dollars of stock" will be traded as funds tracking the Nasdaq 100 buy and sell in response to the rebalancing.
During this short-term rebalancing phase, I can easily visualize a convenient time for investors to reload their ammunition. Load up the bullets before we are off to the races again.
Heading into the last 4 months of the year, the US consumer is strong as steel and I would beg any black swan to show their ugly face and try to topple this kryptonite tech market.
An orderly dip in tech stocks this earnings season would represent nothing more than a massive victory and if it’s sideways then watch up to the upside.
I would even say there is a higher risk that dip buyers get a little impatient and pull the trigger a little early just to make sure they get some skin in the game for the next elevator up.
That’s how hot tech has been.
Mad Hedge Technology Letter
July 21, 2023
Fiat Lux
Featured Trade:
(WHAT TO DO ABOUT NETFLIX SHARES?)
(NFLX), (APPL), (MSFT)
It’s quite the irony that Netflix’s earnings report came smack dab in the middle of Hollywood’s meltdown as the contract standoff between writers and studios threaten to implode a Southern Californian industry that has been on life support for quite some time.
One’s famine is another’s fortune.
NFLX had a mixed earnings report so it’s not like it has been gangbusters for streaming platforms either.
They used to be a perennial tech growth company and now they are down to just 3% revenue growth which won’t cut it.
NFLX has been saved by the macro picture as traders scurried into tech stocks from early 2023 while investors bet on a Fed pivot and a reversion to the mean after a horrible 2022.
The business itself isn’t doing anything special like it used to, and they are also way too woke, but when they don’t have to be spectacular, it’s easier for the stock to elevate.
The brightest number of all was the addition of 5.9 million subs.
Netflix, which now boasts 238 million global subscribers, will keep benefiting from this password-sharing clampdown.
Some expected it to backfire, but viewers have flashed their wallets and signed up for the service.
The streamer boasted that “sign-ups are already exceeding cancellations” and that it is implementing the password policy across the world now.
Profitability is starting to become an issue for NFLX as they missed on revenue.
Streaming has become a worse business lately because the world is too saturated with content.
Another positive is that NFLX upped its free cash flow from $1.5 billion to approximately $5 billion for the year.
This is what mature tech companies are supposed to do.
Eventually, they will increase deliverables back to the shareholder in the form of buybacks and dividends like Apple (AAPL) and Microsoft (MSFT).
The company cited “lower cash content spend” amid the writers’ and actors’ strikes that have brought content production to an absolute standstill.
No more $9.99 ad-free plan.
Netflix axed its cheapest ad-free option in the US and the UK. The plan, offered at $9.99, is no longer available to new customers.
The decision to cut the skeleton plan appears aimed at pushing subscribers in that price tier toward the ad-supported model, which is priced at $6.99. The company has previously said the ad-supported model performed better on the “economics” than the $9.99 ad-free model.
NFLX shares have had a great year so far with shares up 44%.
The 44% upswing is also after an 8% drop yesterday on this earnings report.
Clearly, traders used this opportunity to take profits.
NFLX’s performance is part of my wider thesis that earnings won’t be anything special, but good enough to deliver a better entry point into these stocks.
Buy the dip strategy will perpetuate for most brand-name tech companies.
It’s not exactly simple to get into a stock that has gone up 44% in 7 months because most of the time the stock needs to be chased.
Chasing tech stocks is an underlying theme of 2023 with fear of missing out (FOMO) engulfing most fund manager’s plans of attack.
So yes, I do believe many investors will use these tepid earnings reports to take profits and these dips are incredibly healthy for the tech sector.
Thus, traders should reload because tech stocks like NFLX will be on discount before the next leg higher.
