As we approach the end of 2024, the financial markets are experiencing a turbulent phase, primarily influenced by the Federal Reserve’s recent insinuations regarding interest rate policy. The transition from what was previously characterized as a “dovish pivot” to an anticipated “normalization” in monetary policy may pose significant challenges for stock indices, particularly the Nasdaq 100. This change in tone has already led to increased volatility, and signals a potential cessation of the so-called “Santa Rally” that typically boosts stock prices in December.
The Fed’s latest revelations following its monetary set-up, particularly the updated “dot plot” and comments from Chair Jerome Powell, have set off alarm bells among investors. Analysts took note of the Fed’s cautious stance towards future interest rate cuts, especially in light of the inflationary pressures that could emerge as a result of new fiscal policies. The “America First” agenda by the incoming Trump administration has been identified as a variable that may exacerbate these inflationary risks.
The notion of lesser interest rate cuts in 2025, coupled with a possible normalization of rates, sets an unsteady stage for investors hoping for a smooth year-end finish in the equity markets. Consequently, the optimism surrounding a year-end rally is diminished, raising the stakes in a market already prone to fluctuations.
Weakening Momentum in the Nasdaq 100
In the context of this shifting landscape, the Nasdaq 100 has illustrated a notable decline in momentum. What began as a robust upswing, culminating in a new all-time high of 22,133 on December 16, quickly morphed into a corrective retraction. Following the Fed’s disclosure, the Nasdaq 100 lost approximately 4%, indicating a significant shift and positioning it as one of the poorer performers among major indices.
Technical indicators have now begun to mirror this declining sentiment. The proportion of Nasdaq 100 component stocks trading above their respective 20-day and 50-day moving averages has dwindled sharply, with dangerously low figures appearing just a few days later. There is now an alarming 9.9% of component stocks exceeding the 20-day moving average, and only 33.7% above the longer-term 50-day moving average.
These indicators suggest that market breadth is thinning significantly, a development that typically bodes ill for sustained bullish movements. As fewer stocks participate in the rally, it raises concerns about the sustainability of the overall market’s upward trajectory.
Key Technical Support Levels and Further Concerns
As the market evolves, the critical level to watch in the Nasdaq 100 has emerged at 20,790—a key intermediate support point. The performance of the index in relation to this level could determine whether we are on the cusp of a prolonged corrective phase. With the recent downturn from its all-time high, there are indicators pointing to long-term bearish momentum. The Relative Strength Index (RSI) has slumped below levels that traditionally signify stability, suggesting that 20,790 may indeed represent a “weak support.”
If the Nasdaq 100 breaks this crucial threshold, the likelihood of a multi-week decline seems heightened. The next potential support levels would then be found at 19,840 and 18,310. However, a scenario of recovery cannot be completely discounted. A successful breach above the 22,470/980 resistance area could invalidate bearish predictions, propelling the index toward newer highs, with targets set around 23,980, 24,440, and 25,080/570.
The shifting sentiment in the realm of U.S. monetary policy, combined with deteriorating technical momentum in the Nasdaq 100, presents a complex landscape for investors. The prospect of a “Santa Rally” appears increasingly elusive, as market participants grapple with concerns over inflation and policy normalization. With near-term volatility likely, and significant technical barriers presenting themselves, prudent navigation of this transitional market phase will be essential. Investors would do well to remain vigilant, stay informed, and adjust their strategies as new data and signals unfold. The coming weeks will be crucial in determining the direction of the market as we close out the year.