The NASDAQ index clawed its way back into positive territory last week, returning to more of an upside pattern, but many analysts are wondering whether further dicey economic data from the US will upset the apple cart and prevent a full NASDAQ rally.
Even though the NASDAQ 100 surged 4% on August 8 and the bulls seem to be in control this week, some analysts are telling us they are not ready to dive in headfirst before more US economic data comes in to reassure them.
Can the NASDAQ index bounce back?
This includes Dilin Wu at Pepperstone: “In my view, the recent surge in the NASDAQ can be attributed to two main factors,” she said. “First, a slight decrease in initial jobless claims in the US, which eased some concerns about the US economic outlook; and second, Japan’s indication to maintaining stable market conditions by not tightening policies further in the short term.”
While the temporary relief from the yen’s carry trade unwinding might seem like a solution, Wu is not convinced that a single improvement in US labour data can completely erase worries about a potential economic recession in the US.
US stocks are in a similar situation to property sector in China – meaning that even while the US data look far from a full-blown recession picture, a slowdown can be enough to trigger a downturn, with traders’ recession fears potentially becoming a self-fulfilling prophecy. In this case, the NASDAQ’s upward momentum requires a steady stream of positive economic data, not just a flash in the pan.
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Is a sustained NASDAQ rally on the cards?
Technical analysis specialist Trend Intelligence has also been examining the NASDAQ’s performance recently. Trend’s M* Momentum Indicator creates a clear visual representation of price trends in play across indices, asset classes and financial instruments.
In their Nasdaq 100 chart below, Trend Intelligence reports negatively trending M* and M* Signal lines, but with both indications still operating above their critical zero line. This is, and has shown over time to be, a neutral trend signal.
In addition to the M* indicator, price currently trades above 2 of Trend’s moving averages and still above the Japanese Cloud, shaded in pink.
The combination of all of these signals corroborates Trend Intelligence’s positive medium-term trend rating on the Nasdaq 100, and the research firm is projecting neutral/positive price returns for the future weeks and months ahead.
So, a NASDAQ rally? Global markets concerns continue to swirl over the trajectory of the US economy. Goldman Sachs has said that it believed that there is a 25% chance of the US falling into recession in the next year, compared with its previous odds of 15%.
Recession worries remain
“Recession worries are not a huge contributor,” Trend Intelligence explained in a recent report. “The move in the Treasuries and corporate bond spreads would have to be much larger before the markets concluded that recession fears are the biggest driver. Economic data remains mixed rather than bad.”
“In my view, the NASDAQ’s trajectory hinges significantly on forthcoming data,” says Pepperstone’s Wu. “For bulls to find their sweet spot, the ideal scenario would be a 25bp Fed rate cut in September, rather than a front-loaded 50bp cut that might suggest an emergency measure and raise concerns about the economy’s health.”
