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Nasdaq traders wait for Risk-On to continue.

Nasdaq Index Analysis

US equities are trading near their all-time highs, but as we go through the earnings season and wait for central bank decisions, we have time to take a look at where prices may end up in the near to medium term.

Stock futures are basically mixed today as investors look ahead to a monetary policy decision from the Federal Reserve tonight. But if you were to scroll out any number of years all the way back to May 2009 and the bottom of the Great Financial Crash, it is clear to see that the major indices are in a massive bull market. Which makes sense if you consider the purpose of the indices is to promote the companies that do well and drop the companies that come under the ‘Dogs of the DOW’ moniker. Each index drops a company or two on a fairly regular basis allowing new companies that are proving themselves.

The Nasdaq composite is made up of 100 companies, but a handful generally moves the market.

1. Apple (NASDAQ:AAPL)

2. Microsoft (NASDAQ:MSFT)

3. Amazon (NASDAQ:AMZN)

4. Facebook (NASDAQ:FB)

5. Alphabet Class C (NASDAQ:GOOG)

6. Alphabet Class A (NASDAQ:GOOGL)

7. Tesla (NASDAQ:TSLA)

If we take the above list as being the top 6 (putting Alphabet into the one Google), these 6 companies are 50% of the entire index. So, when they do well the “rising tide lifts all boats”, saying becomes very apt.

Last night we had the earnings report from Microsoft Corp. who announced the following results for the quarter ended December 31, 2020, as compared to the corresponding period of last fiscal year:

· Revenue was $43.1 billion and increased 17%

· Operating income was $17.9 billion and increased 29%

· Net income was $15.5 billion and increased 33%

· Diluted earnings per share were $2.03 and increased 34%

The figures above would have the average traded believing that this company was doing extraordinarily well considering the figures are steller. But let’s consider this, if the company did well on the back of people using tech during the pandemic, what happens when the pandemic eases? Can they maintain revenue growth?

The market prices in the future expectations and it could be assumed that the MSFT shares have risen to the point where investors see little headroom above and have decided to take profits. As it was last night, the aftermarket trading did see a dip in prices, but today’s action is showing that general consensus for Microsoft to still be bullish. We have more earnings out today from the likes of Apple and Facebook.

The phrase buy the rumor and sell the news comes into play around these times but we should always remember that the overall trend is for the index to go higher.

Looking at the charts, the monthly show the clearest sign of the growth since the Federal Reserve gave assurances to the market participants that the Fed would provide loose monetary policy for as long as it takes. We’re clearly still in that frame of mind. Though without the pandemic maybe we would be unwinding some of that 2008-2019 QE.

With regards to what happens with the announcements from the FOMC the pattern for 2021 so far is to see a pullback in the equities markets.

On the above chart, the blue arrows are when the FOMC minutes drop on the markets and the reaction has been risk-off each time this year. Considering that we are forming a possible swing high pattern today, there is a strong likelihood that the market pulls back into the previous range at least. This would be confluent with the Bollinger Band moving average, which has acted as previous support post FOMC before.

Other relationships that are playing out currently around risk-on/risk-off is that the USDJPY is tracking the US10 year yields. The yen is traditionally a safe haven currency, and the US 10 year is the benchmark for risk-free investing. So, when traders are moving out of the yen and we are seeing them also sell Bonds it makes perfect sense.

The rising yields are inverse to the declining bonds so tracking the TLT ETF is one way of analyzing current sentiment and momentum in the fixed income markets. The 50-day exponential moving average is looking like it is near-term resistance and the 50 below the 200 is showing bearish momentum.

What has also been happening with the rising US treasury yields is expectations of future inflation and this has weighed on the Nasdaq as the treasury yield curves steepen. A rising US10 year yield is good for the stocks but only if it is in relationship to risk-on, not if it’s because of increasing inflation worries.

The dollar index is also a part of this narrative as it acts as a safe haven when the rest of the world is under uncertain times, as per the pandemic and the FOMC meetings have also acted as support for the dollar this year. The rising in US10 year yields have been supportive of the dollar in 2021 so it could provide more signals on near to medium-term directions in the Nasdaq. The dollar is in a multi-decade downtrend and any bullish moves to the upside like we saw recently are being sold into. The main reason for this is the US Trade Deficit, the US fiscal spending deficit, as the US Treasury and Government spends more into their economy than they tax back. With the amount of new stimulus making its way into corporate earnings and ever-increasing fiscal spending on projects that helped make the US a $5-6 trillion economy, the new infrastructure and green spending will add to this. We should get larger GDP figures and larger corporate earnings, especially in the tech and industrial sectors. This is what a lot of investors and analysts see as the root cause for increasing inflation, but so far, the CPI is not backing that up.

Trader sentiment for the Nasdaq as seen on the ActivTrader platform is showing the bulls have the majority with 58% of traders staying long. This is not an extreme reading, so hard to play counter-trend to these traders. But if we do get a pullback into support these sentiment readings would swiftly reverse as traders puke their positions, which would then fuel higher prices, I am sure.