Stocks have demonstrated remarkable resilience, particularly as the United States ushers in a seasonally robust phase of the year. The $S&P 500(.SPX)$, has rebounded by more than 6% since late October, primarily propelled by the prevailing conjecture that the Federal Reserve has concluded its course of interest rate hikes. Simultaneously, the yields on 10-year US Treasury bonds have retreated from their zenith of 5%, as discerning investors endeavour to secure favourable yields while contemplating the possibility of a termination of rate increases on the horizon. These dynamics have set the stage for the $Invesco QQQ Trust-ETF(QQQ)$, a representation of the Nasdaq-100, to undergo a brief retracement prior to embarking on a substantial upturn as the year concludes.
Federal Reserve: Job Done?
In the aftermath of last week's Federal Open Market Committee (FOMC) meeting, Federal Reserve officials elected to maintain their benchmark interest rate within the 5.25-5.5% range, all while preserving the door ajar for potential future hikes. Of considerable significance, Chairman Jerome Powell conveyed a notably dovish sentiment, offering a glimmer of hope that the Federal Reserve may have completed its sequence of interest rate adjustments.
Sentiment tracker reveals more dovishness
Moreover, the recent release of employment data, revealing results that were softer than anticipated, has lent further credence to the notion that the Federal Reserve's rate policy is drawing to a close. Labour disputes stemming from UAW strikes led to a reduction of approximately 33,000 jobs from payrolls, resulting in a total net addition of 150,000 jobs last month, which fell short of the anticipated 180,000. Concomitantly, traders are placing their wagers on a future decrease in interest rates in 2024, with long-term interest rates forecasted to decline to 2.5% in the foreseeable future.
Fed dot plot points to rate cuts in 2024
Earnings: Notably Strong
The stock market's ascent has also been underpinned by solid fundamentals, particularly during the third-quarter earnings season for the S&P 500. Notably, the S&P 500 is presently reporting year-over-year growth in earnings for the first time since Q3 of 2022. Of the companies that have disclosed their actual results for Q3 2023, a remarkable 82% have surpassed their estimated earnings per share (EPS), with prominent contributions from firms within the Consumer Discretionary and Information Technology sectors. Looking ahead, industry analysts are anticipating earnings growth of 3.9% for the fourth quarter of 2023 and an even more robust 11.9% for the entire calendar year of 2024.
Most companies have beaten Q3 2023 earnings estimates
Technical Analysis: An Imminent Pullback
Given the pronounced correlation between the S&P 500 index and the QQQ, a meticulous examination of the QQQ's daily chart is warranted, as it is likely to exert a pivotal influence on shaping the directional bias of the S&P. Notably, several of the largest constituents of the $SPDR S&P 500 ETF Trust(SPY)$ are also integral components of the QQQ.
The recent surge in equity markets has triggered indications that stocks are overbought and are predisposed to a short-term corrective pullback. This overextension is discernible through a scrutiny of momentum oscillators such as Stochastics and the Commodity Channel Index (CCI), which currently reside in overbought territory. Presently, the QQQ is trading at a notable resistance level of 370, thus affording bearish forces an opportunity to drive stock prices lower. Additionally, the appearance of a doji candlestick pattern yesterday is indicative of bearish sentiment, further substantiated by the absence of notable trading volume. Notably, futures for US equities are currently in negative territory, signalling the imminent likelihood of a pullback. It is conceivable that the QQQ could retrace to 358, a level representing an unfulfilled price gap, which aligns closely with the 50% Fibonacci retracement of the recent rally.
TradingView Chart
This potential retracement may furnish investors with a compelling opportunity to accumulate shares, particularly those who subscribe to the belief that the era of interest rate hikes has drawn to a close, and in anticipation of an impending stock market rally.
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