It sure looks like Wall Street wants to take stocks up. The NASDAQ pivoted higher after setting a 52-week low, sold off after the initial rush higher, and then the index lifted again with a higher low. Higher cycle lows and higher cycle highs are the classic markings of an uptrend. We call that action, walking up the stairs.
Staggered steps higher are part one of a two part, potentially short-term bullish story.
Last week we wrote about the bearish descending channel the NASDAQ has traded within since the middle of August. We noted the index would likely remain in a downtrend as long as it remained between the upper and lower guardrails.
Monday’s rally pushed the NASDAQ beyond the top edge of its price range for the first time in two months. That’s part two of a possible bullish story that could unfold in the next few weeks.
The question becomes how high can the NASDAQ go?
There are two clear lines of resistance overhead. The first is at 11,250, the early October peak and then at its 50-day moving average of 11,475 and falling. Since investors seem to have an affinity for even numbers, technical wiggle room to 11,500 on the top side.
The Federal Reserve is why stocks have done an about-face. Monetary policy makers at the central bank might pause its rate hikes, exciting bulls. (1) Maybe economic reports have softened enough for The Fed to change its tone.
September US manufacturing and services indexes reports didn’t live up to expectations to start the week. The services report was troublesome, registering a score of 46.6 versus expectations of 49.7 and lower than last month’s 49.3 reading. (2) Generally speaking, a score under 50 signals a contracting economy and points to a potential recession.
While manufacturing remained north of 50, services are more important because they account for more than three-quarters of the US economy. (3)
Now you know why, Jerome Powell and company put the word out that a pause in rate hikes is on the table and why stocks pivoted higher. While a policy change might be good for stocks in the near term, inflation remains a big problem. If the Fed isn’t careful, short-term gains could turn into longer term pain if high prices don’t cool down.
Commodities and Technology dominated the top of our sector/industry performance leaderboard. The prospect of a pause takes some of the luster off a rising dollar, which is a positive for commodities like precious metals, oil, and gas. Meanwhile, tech stocks tend to find their way towards the top of the list when markets rally.
As much as we believe the NASDAQ is inclined to go higher. We are still only borderline bullish. We’ve been around too long and have seen too many head fakes to fall in love at first sight. Let’s give the NASDAQ a little more room to confirm its recent reversal.
1 – https://www.ubs.com/global/en/wealth-management/our-approach/marketnews/article.1577467.html
2 – https://www.marketwatch.com/story/flash-pmi-data-show-u-s-economic-downturn-gathering-significant-momentum-in-october-says-s-p-global-11666621050?mod=economic-report
3 – https://www.statista.com/statistics/270001/distribution-of-gross-domestic-product-gdp-across-economic-sectors-in-the-us/#:~:text=In%202019%2C%20the%20agriculture%20sector,the%20GDP%2C%20at%2076.89%20percent.