Who knew that 7.7% year over year inflation was a good thing for stocks? Apparently, it’s what the Wall Street doctor prescribed as the Dow Jones Industrial Average jumped more than 1,000 points on the “cooling” inflation numbers.
Anybody who goes to the grocery store knows current inflation is bad for their wallets. However, there might actually be good news for investors’ portfolios despite being terrible for their budgets. It’s been our experience that when bad news doesn’t send stocks tumbling but soaring instead, it can be a signal that a reversal could be at hand.
While most focus on day-to-day price swings, the market is a forward-looking indicator. It’s believed today’s market reflects where the economy will be in six-to-nine months. So, when bad news suddenly no longer sends bulls to the hills, it’s a big hint that Wall Street sees things getting better on the horizon.
And that might be where the NASDAQ is today. The index tore through its 50-day moving average and resistance at 11,250 following the “it’s not so bad” inflation report. The market sold off on Monday following news from the Fed that they will stay the course until they get inflation down to their target. However, the Central Bank also said we could be approaching a time where the hikes slow.
Connecting all the dots, the way we read it, the Federal Reserve will continue to raise rates, but smaller hikes, inflation, while still above normal, is likely to moderate, with the economy improving sometime in the middle of 2023. As a result, the financial markets could be on the verge of a reversal.
Here are the key numbers.
As long as the NASDAQ stays above 10,750, preferably north of the 50-day moving average of 11,005.53, it’s likely to continue to head higher with the 200-day moving average as a likely target. There could be resistance at 11,500, there is not much resistance after that until 12,200ish.
Index investors might consider easing into an exchange traded fund (ETF) like Invesco QQQ Trust (QQQ) as long as it stays above 10,750. They might think about adding to their positions if the NASDAQ closes above 11,350.
This was easy to predict. When stocks fly, technology usually pilots the plane. It’s no surprise to see tech ETFs dominate the top of our sector/industry leaderboard, owning the first five spots and each up more than 10% in a week.
Amplify Online Retail ETF (IBUY) could be the timeliest of the group of high-flying performers. The holiday shopping season is about to swing into full black-Friday and cyber-Monday madness. IBUY might be poised for a holiday rally as well. We’d consider cutting losses if the ETF slips below $40.
Upwork Inc. (UPWK) is our favorite chart amongst IBUY’s holdings. UPWK’s price recently broke a descending trendline, which can be a bullish signal. Shares are resting on the 50-day moving average of $14.15 with downside to the 52-week low of $11.39. Much like the NASDAQ, Upwork might find its way to the 200-day average in the neighborhood of $19 if the market heads higher for the holidays.