KEY
TAKEAWAYS
- The current upside hole round $380 was a key second for the QQQ, but when main development shares proceed to drop, this stage might come into query.
- Whereas a brand new all-time excessive for the Nasdaq 100 is a risk over the following six to eight weeks, the overbought situations for development management names recommend that is unlikely.
- By pondering by way of 4 potential eventualities, from the very bullish to tremendous bearish, conscious traders are capable of higher assess possibilities and handle danger.
I feel Friday’s session was telling, in that the S&P 500 completed the week up about 1% whereas the Nasdaq 100 was almost flat. The highest two sectors on Friday’s session have been Actual Property and Industrials. The underside two sectors? None apart from the 2 top-performing sectors in 2023: Know-how and Communication Providers.
A small distinction in returns, to make certain, but in addition an awesome indication that development management names could also be due for a pullback, whereas worth sectors should not exhibiting the identical excessive momentum situations.
A lot of mega-cap development shares have been overbought not too long ago, and simply as they have been testing resistance from the summer time highs. Charts like NFLX are excellent examples of this short-term bearish sign, the place a inventory that has a fast run greater usually must take a break and reset earlier than the uptrend can proceed.
What may a pullback appear like for the QQQ, and what would that imply for situations heading into January 2024? And what different eventualities are a risk for development shares? Let’s lay out 4 potential outcomes for the Nasdaq 100, and I am going to share my estimated likelihood for every state of affairs.
And keep in mind the purpose of this train is threefold:
- Think about all 4 potential future paths for the index, take into consideration what would trigger every state of affairs to unfold when it comes to the macro drivers, and overview what alerts/patterns/indicators would verify the state of affairs.
- Resolve which state of affairs you are feeling is most definitely, and why you suppose that is the case. Do not forget to drop me a remark and let me know your vote!
- Take into consideration how every of the 4 eventualities would affect your present portfolio. How would you handle danger in every case? How and when would you’re taking motion to adapt to this new actuality?
Let’s begin with probably the most optimistic state of affairs, involving a brand new all-time excessive in January 2024.
Possibility 1: The Very Bullish Situation
Probably the most optimistic state of affairs would imply the final week was a little bit of an aberration, a short respite within the 12 months of development dominance. The Magnificent 7 shares break greater into year-end, giving the Nasdaq 100 a brand new all-time excessive in January. Is that only the start of a supremely bullish 2024?
Given how shares like GOOGL and NFLX have already dropped after exhibiting indicators of upside exhaustion, I do not see this as a possible possibility. However it’s all the time good to suppose by way of the goldilocks state of affairs, if solely to suppose by way of what indicators may present it is turning into extra probably.
Dave’s Vote: 10%
Possibility 2: The Mildly Bullish Situation
When you suppose development shares do pull again from their overbought situations, and that the pause on this current upswing delays any additional rally into early subsequent 12 months, then this can be a extra first rate alternative. The hole greater round $380 from a pair weeks in the past after October CPI looks as if a good draw back boundary for this mildly bullish state of affairs.
This one is absolutely my base case right here, because the seasonal patterns would recommend a powerful December following a powerful November. However I see indicators of upside exhaustion in breadth indicators as effectively, and I might not be stunned if a pullback continues into mid-December.
Dave’s vote: 60%
Possibility 3: The Mildly Bearish Situation
What if the hole talked about above doesn’t maintain, and an preliminary pullback within the Magificent 7 shares finally ends up ushering in extra sellers who start to worry a a lot additional drop? Pullbacks in uptrends will be sudden and disorienting, and even when worth shares like Industrials and Financials handle to rally, it nonetheless would not be sufficient to stop our growth-oriented benchmarks from pushing decrease.
I may see this taking place given the severity of the rally off the October low, and that worth hole round $380 goes to be an necessary stage to observe. It is onerous not see charts like NFLX as a giant double prime proper about now!
Dave’s vote: 25%
Possibility 4: The Tremendous Bearish Situation
I all the time embrace a really detrimental and not possible state of affairs, as a result of it helps to consider what danger elements may gentle as much as warn of extra promoting to come back. If financial information in December is available in hotter than anticipated, or the Fed stresses that extra fee hikes are nonetheless on the desk, or the Ten 12 months Treasury Yield turns again up towards 5%, then this might definitely occur.
A drop beneath the October lows appears extremely unlikely, given the seasonal power in December and the way a lot development shares must drop coming off a really strong run greater. However it’s greatest to suppose these choices by way of earlier than they really occur!
Dave’s vote: 5%
What possibilities would you assign to every of those 4 eventualities? We have now two movies queued as much as present you ways every state of affairs might play out, and the way we might assign possibilities to every of the 4 choices.
Watch this one first, which outlines the 4 eventualities and the way they might play out:
Then watch this one, which assigns the chances for every together with what motivated the outcomes:
RR#6,
Dave
P.S. Able to improve your funding course of? Try my free behavioral investing course!
David Keller, CMT
Chief Market Strategist
StockCharts.com
Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your individual private and monetary state of affairs, or with out consulting a monetary skilled.
The creator doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the creator and don’t in any manner signify the views or opinions of some other individual or entity.
David Keller, CMT is Chief Market Strategist at StockCharts.com, the place he helps traders reduce behavioral biases by way of technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness methods to investor choice making in his weblog, The Conscious Investor.
David can be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency targeted on managing danger by way of market consciousness. He combines the strengths of technical evaluation, behavioral finance, and information visualization to establish funding alternatives and enrich relationships between advisors and shoppers.
Be taught Extra
