The NASDAQ has fallen hard and while we think we could see a relief rally there is far more downside to come to correct its bullish extreme. Our view of the fundamentals, sentiment, and technicals below…
The NASDAQ is seeing a lot of volatility JPM notes that:
“Coming out of the dot-com crash (2000) the NDX was -36.84%…then proceeded to decline 32.65% and -37.58 in 2001 and 2002 respectively. Just because they go down a lot, doesn’t mean they can’t go down a lot more.”
“Tech stocks have declined 22% since the NASDAQ peaked in November 2021, including a 13% decline in April. The retreat is not dissimilar from the pullback in the first 5+ months (18%) following the bursting of the tech bubble in March 2000) – begging the question of what similarities/differences exist with tech today vs. the unwinding of the tech bubble. Ominously, the NASDAQ went on to fall 80% from peak levels before bottoming in September 2002.” (The Market Ear)
The Impact of Fed Stimulus and Expansion of the Balance Sheet
Global stock markets as we noted in a previous article were helped higher by massive Fed stimulus after the global economy was hit with COVID but on Wednesday we have the Fed and they are not only likely to raise interest rates by 50bps we should also learn when they intend reducing the balance sheet.
Fed to Be Hawkish – Balance Sheet Run-Off To Start May or June?
Will the Fed be cautious in light of recent poor economic data including a miss in GDP?
No, the May FOMC meeting will see the Fed note its objective is to bring inflation down by aligning itself with the market’s expectation of “frontloading” rate hikes and starting quantitative tightening (QT).
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Fed Chair Powell has pretty much confirmed that the Fed will hike rates by 50bp at the May meeting and confirmed our expectation that the Fed will make a formal announcement of balance sheet run-off.
“We consider the aggressive Fedspeak and the promotion of moving “expeditiously” to a “more neutral” policy stance to increase the likelihood that the FOMC will go ahead and implement its balance sheet run-off in May as well, but risks are that they will wait until June.
Senior FOMC officials, including Lael Brainard and John Williams, lean towards a 1-month gap between an announcement and the implementation and so does the latest Primary dealer survey.” (NORDEA)
Even if they were to delay it by a month would that cause a rally in stocks? We doubt it. We think there is no reason for a delay and the run-off is a big negative for stocks.
The Big Level of Resistance 14000
The market is a long way from fail value and more downside is expected. In terms of a rally, it would be a selling opportunity back to the 14000 level and the mid-BB which we can see on the weekly and daily charts below.