Nasdaq is stair-stepping higher, regardless of the inflation worries

Technical traders are benefiting from using the daily highs, lows, and intraday support and resistance levels. The fundamentals also back up the bullish narrative for the Nasdaq currently, with the fixed income markets the one to watch for when they pull the rug from underneath us.

Index Analysis - Nasdaq

The Nasdaq 100 has recently broken through some significant levels, which I believe are setting this market up for a push to 17000. On the5th November 2021, Nasdaq’s all-time high was printed which is 16455on the ActivTrader platform. After that high, the price action has come down to form a significant swing low on the 10th of November 2021 and now we’re trading within the range of these two levels. Having recently broken through the mid-point of this range we’re now preparing to break to new all-time highs. On the 10th of November, US CPI printed 6.2% and the US 10-year notes dropped, resulting in the yields rising on traders’ expectations of a rate hike by the Fed.

Rising yields can be a bullish signal for equities as a flight to safety and the Treasury market is usually a signal of doom for high-risk assets like stocks. However, when the yields are rising on inflation fears, the market dynamic switches, and the US equities, especially those that are high growth, and high debt balance, fall. Rising interest rates would curb their ability to keep growing at a high pace. The sell-off stopped and for the last few trading days, we have been stair-stepping higher again.

Getting above the November 10th high was a key signal that those traders who were short had just got stopped out or had reversed their position. The subsequent drift higher in the Globex session on the 11th of November resulted in that day’s high, with the sell-off on the 11th during the Initial Balance stopping at the 50% retracement of that new swing high to the key swing low from the 10th November. Looking left across the chart, you can see an area of balance too, which showed that the buyers had not only outnumbered the sellers on that day, but they were also still there!

Yesterday’s price action got back above the intraday high and ended the day near those highs, showing that the bulls were still fully in control. In my morning prep today, I was keen to see a continuation of the bullish trend, which came from a test of the highs from Monday during the Initial Balance in today’s market.

Lots of traders would have gotten short on the worse than expected housing data as it is the only key scheduled data other than a lot of Fed speakers during this US session. The market used these traders’ shorts as a way to get long and within 30 mins we were breaking back to new highs for the day.

The above chart shows the 10-day average fiscal flows from the US government to the non-government. These flows of billions of dollars every day, seep into the US economy through corporate tax profits and social security spending and help prop up the markets. November (dark blue) has seen larger flows meaning spending is not slowing down, it is speeding up. Compared to this time last year (light blue), spending is accelerating.

This chart shows a comparison between the S&P500 index, and the Loans and Leases being created by US commercial banks. Unlike the government fiscal flows which are given to the public essential free and clear, until they tax some of it back, the commercial loans must be repaid. However, these loans show companies are taking on debt with the newly issued credit and they can go and restock inventories and pay new workers, etc. Basically, commercial expansion and a growing economy.

The loans and leases are accelerating higher, which doesn’t happen when the banks are fearful of the near-term future. Like when the global pandemic caused massive disruptions.

One thing that could undo the rising equity markets is the fixed income markets. The word on the internet is that everyone who trades US Treasuries is positioning themselves short the US notes and bonds. As with any trade, when the consensus is going in one direction, the likelihood of an explosive unwind is likely. From the graphs above we can see that the US Treasury general account has successfully been unwound to pre-pandemic levels. What we are seeing in the bar charts below is that US Treasury Secretary Yellen is issuing fewer notes and bonds compared to last year.

This becomes a problem when traders decide they really need to buy a 10-year note or a Bond but find that there is a collateral shortage. It is working now because traders are selling bonds, so demand and supply are okay in this trade. When traders decide they really want a Treasury, demand will exceed supply and the Treasuries will rip higher. At this point, the Nasdaq is probably not a great buy-and-hold asset.

For now, I am keeping with the bullish equities theme, until the markets tell me otherwise.

With that in mind, the trading range that we are currently in from the all-time high to the most significant swing low, when projected to the upside, is a measured move that conveniently touched 17,000. The algorithms know the destination and they will eventually get there. We just need to keep our eyes on the prize too.