If you are relatively new to the world of trading, the “growth trend” represents the massive outperformance of the US technology sector since the 2008 financial crisis. The Nasdaq100 had built up an impressive rally, starting at around 1,000 at the end of 2007 and currently trading around 9,600 points. No one expected such an unprecedented market performance and today we would like to talk some of its particularities. At the same time, we will see how future opportunities could be exploited using CFDs.
Could the growth trend continue?
As long as the Federal Reserve stands ready to act with liquidity, market participants seem to be willing to invest further into the technological sector, even though stocks are extremely expensive at the present time. Although the situation is similar to what we saw during the dot.com bubble, there is no downside fear at the present time, a real reason for worry among traditional value investors.
Right now, the Fed is buying $60 billion worth of treasuries per month and at the same time, it conducts overnight and term repo operations. According to a BIS report published at the end of 2019, hedge funds use sponsored repo in order to increase their exposure on stocks. At the same time, we must not forget that all major tech companies continue to conduct large buyback operations, meaning the upside pressure on valuations continues.
Signs of weakness
The exuberance is poised to end at some point and even though it might take a long time, traders should learn how to keep risk under control because the trend could gradually become unstable. That will mean larger corrective moves, high volatility, due to slowing economic activity in the United States and on a global scale in an accentuated manner.
Until then, CFD trading represents a viable option to profit from short-term market movements. We will have volatility and where there is volatility, we have the potential to generate returns. So far, each minor pullback had been followed by a short squeeze, as the market continues to be complacent.
However, risks to the downside are expected to increase, given that the P/E on tech stocks had reached levels not seen since the beginning of the 2000’s. Any dampening event could trigger price discovery at least for a short period and then tech stocks will be under a question mark. As the price action shows right now, the trend looks poised to continue, but any bull market has an end, eventually.