Weekly Index Analysis
The United States major indices started the session higher today following on from the earnings reports last night as we all await the Federal Reserve’s decision on their monetary policy. The rates decision and Press Conference are being held in the middle of the earnings season, so it is hard for the market to gauge exactly where to position itself. The other worrying thing playing on investors’ minds is related to the ongoing COVID-19 pandemic disruptions. Yesterday the US CDC brought back guidance that masks should be worn indoors even for fully vaccinated Americans. Apart from the political and public backlash against re-introducing measures like this, the bigger worry is that the economy is still going to suffer more bottle necks and supply chain disruptions as the disease is clearly not going away anytime soon.
The main negative point made during the earnings reports conference calls, were that the supply chain disruptions are a CEO’s greatest worry for future growth. Pent up demand for technology and Electronic Vehicles is one thing, but to have a lack of supply of the product is another. Cross border disruptions in the UK to Europe can delay even sending a small package back as a return, and as a lot more of us are using online sales portals, we will need the ports etc. to be free of these disruptions.
Yesterday’s earnings were from technology giants Apple, Microsoft, and Alphabet who all reported better-than-anticipated quarterly results. Boeing also beat estimates, along with pharmaceutical firms Pfizer and GlaxoSmithKline. Later today Facebook delivers its earnings report for the second quarter after the markets close.
The Nasdaq 100 is off its all-time highs which may be a little confusing for the retail trader considering the latest earnings data released over the last couple of days. Alphabet (Google), Apple and Microsoft make up around 33% of the Nasdaq 100.
Apple sales top estimates on demand for 5G iPhones, but investors were left wondering where do they go next with their product innovations? EPS & Revenue beat expectations which is great and the work from home environment that gave the iPad and Mac revenues a boost continue to beat expectations. The other arm to Apple’s core business is Services and that beat expectations too.
Microsoft shares dipped on news that the Azure cloud computing was still not competing with AWS which is the market leader and on the news that Alphabet are pouring in funds to compete with Microsoft. However, forward guidance was positive and that has given shareholders confidence to stick with the tech giant.
Alphabet smashed analyst estimates on rebounding digital ads from Google search and renewed growth in YouTube ads. On the release of the earnings reports you were probably looking at the Apple chart and thinking it was another case of “Buy the rumour sell the news”. But the company has been growing exponentially for over 13 years and with the 5G iPhone sales likely to keep boosting revenues the thought should be to “Buy the Dip”. Apple had dropped 2% in aftermarket hours and then dropped to around $142 at the start of the US open today. Within the Nasdaq initial balance period Apple was back trading at settlement prices from yesterday and looks very likely to test higher.
Alphabet had popped 3% during after-hours and is looking like a moon shot from the open today. As is Microsoft which was little changed in the aftermarket last night after some fluctuations.
These three behemoths are very likely to drag the Nasdaq to the next major level of 15,500 and then 16,000 assuming the FOMC don’t do anything to radical which spooks the markets. Using the Nasdaq’s initial balance (first hour of regular trading) as a range. The resistance levels today are 15,092 and 15,153, while the support levels are 14,911, 14850 and 14,789.
Considering the momentum is to the upside, there is a 66% chance that price hits the first level of resistance, and it already very nearly did. There is a 33% chance that it gets to the 15,153 today too. Though that must happen before the Fed really, as they make everything a 50/50 in my opinion.
The S&P500 is also controlling the US indices currently as when the S&P500 rallies a little this frees up the Nasdaq to go higher, but as soon as traders start showing size on the offer the S&P500 drops back to VWAP and that brings down the Nasdaq.
Assuming the FOMC doesn’t taper and cause some sort of market tantrum, the better-than-expected quarterly earnings, combined with strong momentum and price action, should see the Nasdaq continue to test higher. If we do get a pullback, the daily 20 and 50 exponential moving averages have proven time and time again that they are the levels to start looking for trading signals.
For a long term buy, waiting for the Stochastic (10,3,3) to be in the oversold zone has also been a great tactic. But as we have discussed many times before, the fundamentals and underlying market conditions will ultimately guid the direction of the Nasdaq.
This year we have learned that the Tech stocks will not react favourably to concerns of rising inflation worries. We have seen over the past year and even further back, that when the central bank keeps a loose monetary policy, the equities markets do very well. This is due to low interest rates equalling lower yields on fixed income, which then makes trading on margin more attractive especially in a higher yielding equity, index, or derivative.
Buying breakouts have worked out in the long run if trading to the upside but that as a strategy will come to an end when these markets finally decide to turn lower. If the US Senate cannot come to an agreement on the next round of stimulus, or even get to a point where they kick the can on raising the debt ceiling we may get a change in the underlying supporting conditions, as the Fed and US treasury will have to come up with a plan. That is why I favour being patient and waiting for a pullback based on some headline news event. Which could be tonight’s FOMC??
The Nasdaq continues to trend higher following the mid-Jun completion of the bullish consolidation pattern and resumption of the long-term bull trend. 14,771.75 proved to be initial resistance but it failed to provide a meaningful reversal.
Goldman Sachs have growing concerns about the maturity of this rally as breadth is deteriorating as there are growing divergences between the indices and seasonal headwinds are approaching. The seasonal backdrop for global equities generally, transitions from bullish to significantly more challenging. Traditionally the summer vacation months lead to the doldrums and late July until September can be very sideways in price action. Sometime culminating in a big sell off but generally this has been a blip before the resumption of the greatest bull run ever.