the looming fed pivot moves markets to crescendo

The NASDAQ-100 (QQQ) and Nvidia (NVDA) went into last week trading at extremely oversold conditions on their hourly charts and were both due to bounce big time as we noted in our weekly round-up article entitled “Double-Correction: Where’s the Bottom and How to Navigate the Turmoil.” In no uncertain terms, we wrote:

Both the QQQ and NVDA have reached extremely oversold conditions on the hourly chart and are now likely to bounce early this week. As we’ve mentioned a few times before, while overbought conditions (RSI>70) has very little in the way of predictive value, oversold conditions is a different story. Anytime we get oversold markets (QQQ/SPY/DIA), there’s high probability for a near-term bounce at a minimum. 

A back-test of ANY period in the market’s history bears this out quite clearly. There’s no question that deeply oversold conditions on the hourly chart preceded a big bounce in the market in the overwhelming majority of cases in the historical record. That’s one indicator that is independently very reliable. The NASDAQ-100 finally reached oversold conditions on Friday and is likely due to bounce on Monday or Tuesday of this week. With CPI due out on Wednesday before the open, I expect we’ll see the market up big on either Monday or Tuesday of this week.

We backed up those comments by going 50% long in both our common stock and options portfolio at the September 6 lows. We bought our entire Nvidia (NVDA) common stock position at $101 and $104 and we’re set for the long-term. We’re not adding to that position as it represents a full allocation into Nvidia (NVDA). We also bought 70% of our Nvidia (NVDA) call-option position and we’ll add to that on the first Nvidia (NVDA) pull-back which we’ll discuss below.

Suffice it to say we were pretty confident both the NASDAQ-100 (QQQ) and Nvidia (NVDA) would see a substantial rebounds at a bare minimum last week. Our near-term rebound price targets called for Nvidia to rebound up to $110-$112 a share and for the NASDAQ-100 (QQQ) to rebound to $462 a share (from $448.50 lows). Both Nvidia (NVDA) and the NASDAQ-100 (QQQ) far surpassed those price-targets and now both are sitting at relatively overbought conditions on the hourly.

So the question is where do we go from here and how the looming Fed Pivot impact the near, intermediate and long-term outlook.

Friday, September 6, 2024 represented the low-point of the double-correction that began when the NASDAQ-100 (QQQ) reached $485.50 a few weeks prior. As we mentioned last Sunday, “With the NASDAQ-100 down 7.7% from its $485.54 highs set on August 22, 2024, there’s no question that a double-correction is now underway. In fact, that already puts this correction at the same level as the April 2024 correction (8%) and puts it ahead of at least 8 other corrections going back to 2010.”

Our expectation for the double-correction was that the NASDAQ-100 (QQQ) was unlikely to take out its August 5 lows. Why? Because the rebound from the August 5 lows to the August 22, 2024 highs represented a near 80% retracement of the entire July-August correction. This is significant because anytime the market retraces 50% of its losses, it’s a huge indication that the lows are in.

With the QQQ having risen $62 from $423.50 up to $485.50, the chances the QQQ would ever take out much less revisit the August 5 lows was very slim. Last week’s rebound from $448.19 up to $476.50 makes it even more unlikely that we see the lows. In fact, the rebound we saw last week makes it very likely that the lows of the double-correction are already in. Chances are the NASDAQ-100 (QQQ) breaks out this week on the Fed Pivot and then rallies back to its all-time highs in the coming weeks. That’s what we expect to happen and we believe this given the size of the rally this far. If the market was really all that uncertain or tentative, the NASDAQ-100 (QQQ) would have peaked well below its 50% retracment line. Anytime we see a really take out the 50% retracement, the bulls are back in control. That’s what separates a dead cat bounce, from the real deal. The chart below shows the NASDAQ-100 breaking the 50% retracement line on the 7.7% correction from $485.50 down to $448.19:

But as anyone can also see in the chart above, the NASDAQ-100 (QQQ) reached overbought conditions during the trading day on Friday. Not a huge deal, but at some point soon we’re likely to see a sharp pull-back this week. I do think that this pull-back could potentially represent the final pull-back before the NASDAQ-100 (QQQ) embarks on a new rally toward its all-time highs. In fact, our plan is to do our final buying during that pull-back if and when it happens this week.

Still, it’s important to note that last week’s rebound has basically killed any chance for the bears to take the NASDAQ-100 back to its $423.45 or $448.00 lows. That’s the key takeaway from last week’s rebound. The damage to the downtrend is done. So here’s where we expect the NASDAQ-100 to trade over the coming days and weeks. We expect a small short-term pull-back to happen anytime between now and the next few trading days. As we noted last week, the key resistance points to watch are $477.50 and $485.50. Those are the two key lines of resistance. If the QQQ rises to $485.50 this week, it will have rallied nearly $40 straight, and have traded overbought for a decent amount of time. At that point, we’d expect a pull-back to the low $470’s. That’s where we old do our remaining buying. The point is the meat of the rally we’ve seen off of the $448.16 lows is already over. A short-term pull-back is going to happen somewhere in the next $13 of upside.

But that’s not super important because chance are right after that we rally straight up to all-time highs. If the QQQ gets up to $485.50, and pulls back to $470 as we expect, the next move up takes the QQQ to $503. This chart below represents our official outlook:

One thing to pay attention to is the Nvidia (NVDA) hourly chart, which like the NASDAQ-100 (QQQ), has pushed into deeply overbought territory. Right now, it’s just a concern worth watching. As I’ve mentioned several times, there is far less predictive value in overbought conditions as there is in oversold conditions. Stocks can remain overbought for substantially longer periods of time that they could remain oversold. At least when it comes to solvent names which are a going concern.

In fact, I think Nvidia (NVDA) is more likely to push up to $130 before it ever pulls back than it is to pull-back from current levels. That is because Nvidia (NVDA) has a history of building strong momentum off of overbought conditions. Not only that, the stock is currently forming a bullish pennant on the hourly. Thus, we’re probably going to see a breakout before we see a pull-back.

That being said, as we’re 100% long our allocation to Nvidia in the SW common stock portfolio and 75% long our target option allocation in the options portfolio, we would use any pull-back as an opportunity to buy our remaining call-option position. See below:

So the question now is what could derail that outlook and what we should be concerned about. There a few things that do concern me at the moment. The big concern I have right now is the CME Group’s Fed Watch Tool. That tool tracks the fed fund futures which are traded on the CME. Usually, we don’t see a big split in expectations right ahead of a fed meeting. Usually, there’s a general consensus of what the fed is likely to do post-meeting. But here we are three day ahead of the fed decision and 43% of traders on the CME still expect the fed to cut 50 basis points. That’s not a great set-up because it means the market could potentially be disappointed by the fed’s decision on interest rates.

So that’s a concern worth watching this week. I expect there to be more consensus as the week progresses. The flip-side of this is that if the Fed does cut 50-basis points, then with only half the market expecting as much, we’d see an absolute explosion in the market. There’s an inherent asymmetry there. A 25 basis point cut has the potentially of spark a moderate sell-off, but a 50 basis point cut would set the market on a direct course to all-time highs.

The other big thing worth noting — which we mentioned last Sunday — is the possibility for a third correction like we saw last year. For those who read last Sunday’s post, we explained how this exact period last year marked a 71-day total correction which was the largest on record. The NASDAQ-100 peaked in July 2023 — just like this year — and then didn’t bottom out until late October or early November. After having two separate 8-9% corrections, the NASDAQ-100 rebounded back toward the highs before heading into a third and final correction.

However, it is worth noting that the markets didn’t make substantial new lows on each leg lower, the total correction was only 11% — less than the 16% correction we saw this year — and then the QQQ immediately went on to rally to fresh all-time highs by December. What’s more, that correction represented a 15-year record 71-days. We’re already at 45 days in this total correction.

Thus, any way you look at it, I do think in the reasonable worst case scenario, the market has either already bottomed or will bottom very shortly. Even if the NASDAQ-100 were to sell-off on the fed and even if we saw another big leg down toward the September 6 $448.16 lows, we’d like see a bottom fairly quickly and would probably launch into a massive rally back to the highs.

The key point investors should focus on here is this. The economy is strong. The fed has largely manufactured a soft landing as expected. Inflation is in check. The fed is about to cut interest rates and we’re still in the early stages of the post-2022 bull market. At $503 a share, the NASDAQ-100 has only rallied 25% above its previous highs. Bull market to bull market usually goes for 50-100%. There’s nothing in the economic outlook that should lead us to conclude that the correction we’ve seen is anything but a standard correction.

That being said, we are well positioned to weather any storm that comes. Being invested on a 2-year time horizon, our portfolio is built to handle even a 2008 type financial crisis. And I can’t stress enough how important it is for investors to take a long-term time horizon when making their investment decisions.