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Nasdaq 100 Rallies as FOMO prevails Over Fed Anxiety ahead of Key US Inflation Report

Nasdaq 100 Rallies as FOMO prevails Over Fed Anxiety ahead of Key US Inflation Report

Diego Colman, Contributing Strategist
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  • U.S. stocks rally on Wednesday as risk appetite continues to improve on Wall Street
  • The Nasdaq 100 soars 2.1%, but falls short of recapturing decisively its 200-day simple moving average
  • While sentiment appears to be improving, the situation could change quickly if U.S. inflation data for January surprises to the upside and shows renewed momentum in consumer prices

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U.S. stocks powered higher on Wednesday amid a respite in the Treasury market and improved sentiment as quarterly earnings continued to signal strength in Corporate America despite several challenges, including elevated price pressures and cooling economic activity.

At the closing bell, the S&P 500 rallied 1.45% to 4,587, posting its biggest daily gain of the month and coming within a whisker of Fibonacci resistance in the 4,590 area, buoyed by a strong rally in Meta Platforms and Nvidia Corporation shares, which jumped more than5% during the trading session. Meanwhile, the Nasdaq 100 surged 2.1% 15,056 as traders remained intent on buying the January dip in the technology space on FOMO mentality, although it also helped that the U.S. 10-year rate failed to make further progress towards the 2.00% mark.

Risk appetite is recovering, and the VIX's performance is testament to that improvement. Late last month, the fear index briefly spiked to ~39, its highest reading in 16 months, but has since reversed lower to trade near the 20.00 psychological level, a sign that investors are becoming a less anxious about deploying more capital into equities. Although bullish sentiment appears on the rise after the brutal and perhaps overdone sell-off earlier this year, the situation could change in the blink of an eye if Treasury yields make another violent run to the upside.

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The mood could change on Thursday if the latest inflation data shows newfound momentum and more deterioration in the underlying trend. There is no doubt that investors know that the direction of travel is towards more restrictive monetary policy, but a further acceleration in consumer prices could force the central bank to be more aggressive in its efforts to dial back stimulus.

Most traders believe the Fed will begin raising borrowing costs at its March meeting, lifting the benchmark rate by 25 basis points to 0.25%-0.50%, but a segment of the market is betting on a 50 bp hike, with the probability of that outcome at 27% according to the CME's FedWatch tool. There is room for expectations to firm and that could occur if January CPI tops forecasts and rises well above the 7.3% y/y projected by analysts.

The headline figure is certainly useful and often more scrutinized by the media, but traders should pay more attention to the core indicator, as it provides the most insight into the underlying trend dynamics. That said, core inflation is seen climbing 5.9% y/y from 5.5% y/y in December, reaching what would be its fastest pace since 1982.

An upside surprise in inflation will likely push government yields higher, especially at the short end of the curve, weighing on sentiment and prompting traders to position for a steeper tightening cycle. This could trigger a sell-off in risk assets, withtechnology and growth stocks being the most vulnerable due to their expensive valuations and the nature of their cash flows (long duration). For this reason, the Nasdaq 100 is in a somewhat precarious position and susceptible to a sharp pullback as we move through the latter part of the week.

While the bearish thesis is compelling, it is important to analyze what could happen if price pressures in the U.S. economy begin to ease unexpectedly. Should the inflation profile improve, there will be less urgency for the central bank to withdraw accommodation forcefully and assertively for the rest of the year, a situation that could pave the way for a powerful rally on Wall Street. Under this scenario, stocks could gain across the board, but beaten-down names in the tech and growth universe could have greater upside potential, given how much they have fallen in recent months.

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The Nasdaq 100 has staged a powerful rally since its January low, rebounding almost 10% in less than 10 days. The tech index, however, hasn’t reclaimed its 200-day simple moving average, a sign that the underlying bias remains slightly bearish. On that note, if sellers resurface and take control of the market, the first technical floor to consider appears in the 14,450 area, though a move below that area could spark a furious sell-off and push the price towards trendline support near 13,900.

On the flip side, if the Nasdaq 100 manages to climb above its 200-day SMA, sentiment could improve further, attracting new buyers and propelling the index towards Fibonacci resistance at ~15,255. If this barrier is taken out, the 15,616 area would become the immediate upside focus for bulls over the near-term.


nasdaq chart

Nasdaq 100 (NDX) chart prepared in TradingView


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---Written by Diego Colman, Contributor

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.