Today Begins a Battle for the Nasdaq's Soul

Spectacular events are on the near horizon of financial markets. After an extraordinary stick-save by mega-cap tech stocks to salvage January from being the worst beginning to a year in the history of corporate record-keeping, the most popular stock market index ever -- the Covid Trading Mania that is today's Nasdaq 100 -- is in a battle for its soul. This battle takes place at the 200-day moving average.

Bulls hailing from all corners of the globe spent the last 7 days turning around an all-but-impossible train to stop: the careening energy of a decade's worth of macroeconomic narrative going off the rails when Jerome Powell's Federal Reserve made a shocking about-face in its view on how best to support the U.S. economy. Obvious cracks have been forming in the stock market for a year, but most were ignored under the assumption that what is past would continue forever. Instead we're now coming to terms with the uncomfortable truth that the event that held us hostage for two years was in a deservedly sinister way the most enriching period of our lives. But it has to come to an end, because we all are, after all, apes: animals who depend on our physical freedom. Stock market volatility is now as synonymous with the volcanic nature of the post-Covid recovery as it was the original reaction. We poured a lot into the cauldron, and now we see what blows up.

The economy is treading a thin line between reopening and reality. There are too many people that are no longer in the workforce, and there's only two ways to get the jobs filled: wages go soaring, or desperation worms its way back in. The battle between inflation and policymakers is just beginning. The economy's best chance of survival is on the back of the pent-up spending energy of the American buyer, whose household wealth is more dependent on stock prices than ever. So yeah, the line on the chart matters.

The 200-day moving average of the Nasdaq 100 is one of the most-watched momentum indicators on the most-watched index in the world. It represents the steady rate of gains that traders now think they deserve after years of never losing. Yet no one was there to buy when we crashed through it just weeks ago. It was supposed to be an area of reliable support from bulls, but no one showed up. It wasn't until real blood flowed in the streets last Monday -- when we charted the highest VIX since the first Covid spring -- that someone started to buy. Now we're back at a battleground that will determine if this is just another routine dip or the start of a new trend. If bulls hold their ground above the average, a retest of the all-time record looks inevitable.

Right now one could describe the past month as just a more extreme version of past dips that were saved by big tech earnings. But Apple, Microsoft and Alphabet show slowing revenue growth just like the high-flying Covid winners that have been in free fall. If they can't save the day right now, and the Nasdaq falls below last week's low, the index will be trending lower in a way that sends us on a pretty straightforward path toward a bear market.

Here's the good news: stock prices are most detached from the reality of the economy when they are at their most expensive, and this could be a bigger bubble than dot-com! We shouldn't panic if stocks drop. When this cold weather passes and our fear has finally left us, and we're meeting at concerts and flying to see our family, with a freedom that we haven't known for exactly two years, should we really care if Tesla's down? Being bearish stocks is not being bearish on the economy, and it's not being the enemy. It's accepting it's time to move on from Covid.