Marius Paun | London, UK | Senior dealer | Thursday, 20th August 2020
The US stocks continued their impressive rally driven by a better than expected earnings season. Nasdaq, in particular, is still leading the way and making fresh all-time highs in the process as technology shares remain high in demand. Since its coronavirus lows in March, Nasdaq surged 69% with the Dow and S&P both rallying more than 50%. S&P has also broken out to new all-time high earlier this week with Dow not far behind.
The immediate question is now, is there much more upside potential? The optimists point to the nearly $10 trillion in monetary and fiscal stimulus already pumped into the economy and more underway. In addition, near-zero interest rates for the foreseeable futures is the way forward, with the Fed admitting they’re not even contemplating about raising them.
A string of positive economic data coming in over the last few months undoubtedly helped investors sentiment. The better than expected non-farm payrolls figures were accompanied last Friday by the Retails Sales increasing 1.2% month on month. The previous month’s report was revised upwards from 7.5% to 8.4% gain.
The US housing sector also looked in good shape. The Housing Market Index came in at 78 against last months’ 72. On Tuesday, the Housing Starts report showed a jump of 22.6% last month. In fact, the Chairman of the National Association of Home Builders said ‘housing is leading the economy forward’. Even if the numbers point rather more to Big Tech shares and Nasdaq as the leaders, at least some other sectors are doing well, which makes the recovery a bit more broad-based.
Yesterday Nasdaq yet again broke the record high early in the session but disappointing minutes from the last Fed policy meeting overturned that. The minutes were rather vague and gave few clues on whether a more dovish policy will be adopted in the months ahead. It was widely expected the policy would seek to push inflation above the 2% target and also adopt an average inflation target. The minutes stated that a number of Fed members suggested that it would be helpful to make a revised statement on its policy strategy at some point, without any further details.
The Fed also reiterated that ‘substantial improvement in the labour market would depend on the ability to limit the virus’. They reduced the growth forecast as their statement mentioned GDP to be ‘somewhat less robust’. The immediate concern is the lack of stimulus agreement form Congress. However, the executive orders signed the other week providing for extended unemployment benefits, a temporary payrolls tax cut and a suspension of student loans should help in the short term at least.
Consequently, some analysts pointed out the US dollar could remain under downside pressure for longer. The shorts against the greenback are already reflecting that as they are at the highest level since 2011.
As we mentioned before, a particular reason for Nasdaq 100 reaching all-time highs as its constituents. Facebook, Apple, Amazon, Google, Microsoft and Netflix were the standout drivers. This week Apple made history yet again, its market cap reached $2 trillion, about two years after it became the first $1 trillion-dollar company. The latest surge of more than 20% came after it reported better than anticipated earnings on July 30th and announced it would split its stock 4-1.
Interestingly, not long after Apple reached $1 trillion marks, Microsoft, Amazon and Alphabet followed. It seems hard to go short Nasdaq with big conviction now, with that in mind?
The chart shows the bulls firmly in control.
The recent lows of 6632 reached on March 23rd was followed by an incredible rally culminating in a record 11440 yesterday. The short-term moving averages are above the longer-term ones and both pointing upwards. The market price is above both indicators. What makes the current run a rather healthy one is the manner in which was done, not a spike but a rather steady one. The price never moved too much above the moving averages.
On the upside, buyers will be looking for a close above 11440 to confirm the rally still has legs. How long will it last is the million dollar question. Can anyone tell? On the downside, bears will need to break below support just under 11300, the record touched in the first week of August. A breach below could open the door for a possible pull-back and testing support at 11160 followed by 10900.