Stock Market Rally Fizzles on Fed Monetary Policy Jitters

STOCK MARKET OUTLOOK:

• U.S. stocks give up strong early morning gains and take a turn to the downside amid monetary policy uncertainty
• The Nasdaq 100 erases a 1.5% advance and moves into negative as Treasury yields charge higher
• This article explores key Nasdaq 100 technical levels to monitor in the coming days

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After a solid start to the day, U.S. stocks were subdued in late trading on Thursday, giving up all early day gains amid uncertainty over the outlook for monetary policy and higher U.S. Treasury yields, casting doubt on whether the 2023 rally has much chance of continuing. In this context, the Nasdaq 100 is slightly lower on the session and just touch above the 12,500 level, with the tech index erasing a 1.5% advance posted at the cash open.

The strong upswing on Wall Street this year has been partly predicated on the assumption that the Federal Reserve would soon pivot to a less hawkish stance, but that hasn’t happened yet. Although chairman Powell has batted away opportunities to strongly push back against dovish speculations, it is highly likely that the FOMC will have to drive its policy rate, now at 4.5%-4.75%, decisively above 5.0% to restore price stability.

With the U.S. jobs market still firing on all cylinders despite the central bank’s forceful tightening campaign, policymakers may have to keep their feet on the gas pedal for longer to ensure overall prices continue to cool. While the disinflationary process has started as evinced by recent CPI data, tight labor markets could keep wages and household spending biased to the upside, preventing a rapid return of inflation to the 2.0% target.

The likelihood that the Fed’s terminal rate will go higher and stay there for more time than initially anticipated is a clear headwind for stocks, particularly those in the technology sector. While the resilience of the economy may limit downside risk and stave off a retest of last year’s lows for now, investors are forward-looking, suggesting that they are more concerned about the future. That future will darken the longer overly restrictive monetary policy is maintained.

Focusing on the Nasdaq 100, the tech index has begun to retrace after failing to clear resistance at 12,860, a clear technical barrier defined by the 38.2% Fibonacci retracement of the 2021-2022 sell-off. If bears regain decisive control of the market and drive prices lower, the first major support to keep an eye on appears at 12,425, followed by 12,210. On further weakness, the focus shifts to the 200-day simple moving average.

On the other hand, if buying momentum resurfaces and stocks charge higher, an initial resistance is seen at 12,860 and 13,055 thereafter.

NASDAQ 100 TECHNICAL OUTLOOK

Nasdaq 100 Chart Prepared Using TradingView