The good and bad news for the US stock rally – Stock Market News
February 10, 2023 4:27 pm
Major US stock indices kicked off the year on a strong note, with the Nasdaq 100 marking a four-week streak of increases. While the positive market structure looks promising, it could easily crack as lower-quality stocks seem to be leading. The good news
Fundamentals have become more favourable for stock markets lately, helping the tech-heavy Nasdaq 100 index jump out of its range area and gain 15% year to date. Although the percentage change in the broader S&P 500 index was half that bounce, it was enough to hint at a bullish trend reversal as well.
It’s not that the US economy is flourishing. The crystal ball for 2023 remains blurry given the downtrend in business indicators, which developed into a contraction for the manufacturing sector, signalling a looming downturn. Of course, more than 70% of the reported fourth-quarter earnings results have topped analysts’ expectations, but the data showed continuous signs of strain compared to previous releases, whilst the majority provided a negative guidance for the first quarter of 2023.
Nevertheless, traders shrugged off companies’ downbeat outlook, driving stock indices higher and the main reason is the Fed. The Fed chief Jerome Powell confirmed more rate increases ahead during his Q&A session at the Economic Club of Washington last Tuesday. Theoretically, this should be negative news for heavily debt–dependent companies, especially as former rate hikes have yet to take effect, but investors focused solely on his disinflation comments, translating them into a sign that the rate hike cycle will not last for long.
According to the AAll investor sentiment weekly survey, buying sentiment jumped to the highest since November 2021 in the week ending February 2, showing optimism that the uptrend in stock indices might be sustainable. There was a mild positive divergence from neutral traders, therefore the measure is not sitting in extreme territory which could otherwise hint at overdone buying pressures. Likewise, JPMorgan Chase & Co. and Deutsche Bank AG admitted that investors’ sentiment is closest to the neutral positioning since the Fed started to raise rates. Hence, there might be some extra ground to recover in the coming months.
The bad news
Yet, it’s not all bright. The bad news is that although the resurgence in legitimate tech stocks powered the 2023 rally in the Nasdaq 100 and S&P 500, with Tesla and NVIDIA outperforming with a 50-60% gain, a barrage of penny stocks represent a significant share of that upleg.Specifically, the electric car company Lucid group, which is trading at $10.30 and has been reporting negative earnings per share and net losses for more than a year, is among the top performers in the NASDAQ 100, advancing by 50% and faster than Netflix and Apple.
Other nonprofitable software and crypto equities, as well as artificial intelligence stocks, which look to be the new trend on Wall Street such as Buzzfeed and Soundhound, have more than doubled their gains in 2023.That recalls the sudden collapse of the meme stocks rally from the pandemic era, but economic conditions are different now. Monetary policy is tighter, and fiscal stimulus is limited. Hence, investors probably must think again before investing heavily in junk stocks, as the inversion between the 2-year and 10-year Treasury yields also points to a recession.Historically, stock markets tend to trend down before a recession officially starts, and shift to a recovery mode before the recession is over. Therefore, unless the resilience in the labor market prevents a hard landing, the latest upleg will remain under scrutiny as interest rates keep rising.
Nasdaq 100
From a technical perspective, the Nasdaq 100 index raised hopes for a bullish trend reversal after marking a second higher high at 12,896 at the end of January. But upside pressures have been absent since then, with the index heading southwards.
A decisive close below the 12,000 round level would change the outlook back to neutral. This is where the 20- and 200-day SMA have marked a bullish crossover. If the 50% Fibonacci retracement of the 6,634-16,764 upleg gives way too at 11,760, the sell-off could expand to the broken descending trendline at 11,500.
Alternatively, buyers will wait for a clear bounce back above the 12,450-12,946 region to push the index towards the 13,300 constraining zone and then up to August’s high of 13,720.
Major US stock indices kicked off the year on a strong note, with the Nasdaq 100 marking a four-week streak of increases. While the positive market structure looks promising, it could easily crack as lower-quality stocks seem to be leading.
The good news
Fundamentals have become more favourable for stock markets lately, helping the tech-heavy Nasdaq 100 index jump out of its range area and gain 15% year to date. Although the percentage change in the broader S&P 500 index was half that bounce, it was enough to hint at a bullish trend reversal as well.
It’s not that the US economy is flourishing. The crystal ball for 2023 remains blurry given the downtrend in business indicators, which developed into a contraction for the manufacturing sector, signalling a looming downturn. Of course, more than 70% of the reported fourth-quarter earnings results have topped analysts’ expectations, but the data showed continuous signs of strain compared to previous releases, whilst the majority provided a negative guidance for the first quarter of 2023.
Nevertheless, traders shrugged off companies’ downbeat outlook, driving stock indices higher and the main reason is the Fed. The Fed chief Jerome Powell confirmed more rate increases ahead during his Q&A session at the Economic Club of Washington last Tuesday. Theoretically, this should be negative news for heavily debt–dependent companies, especially as former rate hikes have yet to take effect, but investors focused solely on his disinflation comments, translating them into a sign that the rate hike cycle will not last for long.
According to the AAll investor sentiment weekly survey, buying sentiment jumped to the highest since November 2021 in the week ending February 2, showing optimism that the uptrend in stock indices might be sustainable. There was a mild positive divergence from neutral traders, therefore the measure is not sitting in extreme territory which could otherwise hint at overdone buying pressures. Likewise, JPMorgan Chase & Co. and Deutsche Bank AG admitted that investors’ sentiment is closest to the neutral positioning since the Fed started to raise rates. Hence, there might be some extra ground to recover in the coming months.
Yet, it’s not all bright. The bad news is that although the resurgence in legitimate tech stocks powered the 2023 rally in the Nasdaq 100 and S&P 500, with Tesla and NVIDIA outperforming with a 50-60% gain, a barrage of penny stocks represent a significant share of that upleg.Specifically, the electric car company Lucid group, which is trading at $10.30 and has been reporting negative earnings per share and net losses for more than a year, is among the top performers in the NASDAQ 100, advancing by 50% and faster than Netflix and Apple.
Nasdaq 100
From a technical perspective, the Nasdaq 100 index raised hopes for a bullish trend reversal after marking a second higher high at 12,896 at the end of January. But upside pressures have been absent since then, with the index heading southwards.
A decisive close below the 12,000 round level would change the outlook back to neutral. This is where the 20- and 200-day SMA have marked a bullish crossover. If the 50% Fibonacci retracement of the 6,634-16,764 upleg gives way too at 11,760, the sell-off could expand to the broken descending trendline at 11,500.
Alternatively, buyers will wait for a clear bounce back above the 12,450-12,946 region to push the index towards the 13,300 constraining zone and then up to August’s high of 13,720.
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