NAS100 in Precarious State in the Aftermath of the Fed as US Mid-Terms Loom

Adverse Monetary Policy

The US Fed pointed towards a slower path of rate hikes last week, as it raised it by another outsized 75 basis points, to 3.75-4.00%, which is the highest since the start of 2008. However, Chair Powell defended the aggressive moves and ruled out any pause, while shifting focus from the pace to how far rates will increase. ^[1]

More to it, he noted that "we may ultimately move to higher levels than we thought at the time of the September meeting", embracing higher market expectation for the terminal rate. Back then, Fed officials had projected the median rate to peak at 4.6% in 2023, while CME's FedWatch Tool shows expectations of at least 5.25% at the time of writing. ^[2]

Policy makers have delivered a massive tightening cycle since the March lift-off, which has been detrimental to Wall Street and to NAS100 especially, since the tech sector and growth stocks are more vulnerable to the current high rates-high inflation environment.

China Risk Factors

The tech heavy index managed to rebound last Friday and extends its gains this week, despite risk factors from China. Exports from the world's second biggest economy dropped 0.3% in USD terms in October, the first year-over-year decline since May 2020 and the height of the pandemic.

Covid-19 cases are elevated recently and along with China's strict zero-Covid policy economic activity is being impacted. Ahead of the important holiday season, tech giant Apple issued a warning for lower shipments and longer waiting times for its iPhone 14 Pro and iPhone 14 Pro Max, since production in its Zhengzhou factory is impacted from Covid restrictions. ^[3]

Over the last few days there has been some optimism in investors that China will loosen its lockdown policies, but authorities are committed to the strict containment strategy according to Xinhua, citing officials from the national administration of disease prevention and control. ^[4]

US CPI & Mid-Terms

Markets will focus this week on the October inflation figures from the US, due on the Thursday, in the form of the Consumer Price Index. Despite the Fed's tightening efforts, inflation remains stubbornly high. Headline CPI had eased marginally to 8.2% y/y in September, but Core CPI had risen 6.6% and the highest since 1982.

Meanwhile the mid-term elections in the United States are held today, with Democrats facing an uphill battle. They currently hold both chambers, but they look set to loose control of the House and potentially concede the Senate as well. According to FiveThirtyEight's latest poll, Republicans are "favored" to take control of the House and "slightly favored" to win the Senate. ^[5]

It is hard to make an assessment on the impact of the outcome in the stock market (if any), but a Democratic surprise could weigh on the tech sectors, as Democrats in the Congress have been trying to rein in Big Tech, such as Alphabet, Facebook and others.

NAS100 Analysis

The index remains upbeat today after its strong showing over the previous two days, as markets brushed aside recent risk factors, but the upside looks unhospitable. It has the ability push again for the EMA200 and the descending trendline from the summer highs (11,320-11,400). Sustained recovery though, beyond the critical 11,580-11,693, will require a strong catalyst. This is the lower border of the daily Ichimoku Cloud and the 38.2% Fibonacci of the 2021 High/2022 Low slump.

The current fundamental and technical environment is still unfavorable for NAS100, which remains deeply in bear territory. In mid-October, it had fallen to the lowest levels since July 2022 (10,437), with the ensuing rebound contained by the aforementioned 38.2% Fibonacci. This creates increased risk for new lows that would bring 10,089-10,000 in the spotlight.