Wrapping fundamentals, sentiment and technical altogether should lead to a decent hypothesis on trade direction. With so much data coming out this last week since Friday’s NFP we should be good now until the FOMC meeting at the end of the month. So far there have been no market surprises, meaning the Fed have done a good job at their forward guidance.
Weekly Index Analysis
The US economy is still in a very good place. So good that the Federal Reserve will be withdrawing the added support created during the pandemic’s darkest days and then moving to roll off the US Treasuries and MBS from the balance sheet, back into the system.
The unemployment rate of 3.9% is back to pre-pandemic levels seen between 2018 and 2019. US CPI up at 7.1% is high but the rate of change month-on-month is slowing, which could be a sign we’re now peaking. The rising US 10-year yield topped out at 1.80% at the start of this week and following on from Fed Chair Powell’s testimony we’re now back down to 1.70% with further declines expected.
The S&P500 and Nasdaq100 both have the majority of their constituents trading above the daily 200 EMA, which is a good sign of bullish market breadth. I have been following the Nasdaq closest and from the observations this week it only takes a handful of leading stocks to move the index. Apple, Microsoft, Amazon, Facebook, Tesla and Google make up 45% of the index weighting.
After Monday's drop at the open, the leading stocks in the Nasdaq have been tracking higher.
The pace of Nasdaq’s rise this week has been hampered by the other 55% of stocks that have essentially traded sideways. When these other 93 tickers join the leading 7 in either an up or down direction, we see the index trending. What we have currently is a chop fest that barely breaks out from the initial balance each day.
On an intraday chart for the Nasdaq, we took out the liquidity resting at 15,900 and have now started trading above the hourly 200-period EMA. The resistance level has now proven to be decent support today, giving the Nasdaq a greater chance of building on the reversal yesterday. If this is the start of a decent move higher, the 16,600 price level is my next target above.
US earnings season will be upon us soon and the likes of Apple will likely report further supply chain disruptions as cause for any earnings disappointments. However, inventories are rising, suggesting we could be over the worst of those supply chain back-logs, so as long as we don’t get a new wave of lockdowns due to new variants of COVID-19 we could be back to whether or not demand is still growing for these companies’ offerings.
Tesla's products are certainly in high demand. It remains the number one automaker in the US and the global leader by market share, and its Shanghai facility is hitting its stride in China as well. China's Passenger Car Association (CPCA) just released December numbers, allowing for a record level of 473,078 units in 2021. Now that Elon Musk has completed the sale of 10% of his stake, the bounce in the stock price has been very strong.
Over the next 24 hours, we will receive the latest auctions from the US Treasury’s benchmark 10-year Notes and 30-year Bonds. I am going to assume that they will be well bid and in demand, which will help bring the yields lower. If this is the case the last few days price action will have been a look below the recent range, to stop out any weak hands before earnings season. If that is true, I would expect the momentum to increase as the price gets back above the daily 20 and 50-period EMAs. This would be my buy signal to continue the bull trend to new all-time highs.
For the bears, if the indices were to start trading below their daily 200 EMA, this would be a very powerful signal for a larger correction.