NASDAQ 100 & ARKK OUTLOOK
- Nasdaq 100 builds on yesterday’s afternoon recovery and jumps 1.47%
- ARKK also stages a solid rally, but the near-term outlook for growth plays remains bearish
- Wednesday’s U.S. inflation data may spark a pullback in risk assets. This means the recent rebound may be a “dead cat bounce”
After yesterday’s remarkable turnaround, the Nasdaq 100 extended its rebound on Tuesday as Fed Chairman Powell’s appearance in front of Congress brought no new hawkish surprises, enticing dip buyers to scoop up some of the hardest-hit tech shares this year.
At the closing bell, the Nasdaq 100 surged 1.47% to 15,844 while the S&P 500 rose 0.92% to 4,713. Meanwhile, the blue-chip Dow Jones underperformed the major equity averages, rising 0.51% to 36,251. Elsewhere, the most speculative corners of the market posted big gains, with ARK Innovation (ARKK) up 2.75% on the day.
At his confirmation hearing before the U.S. Senate Banking Committee, Powell indicated that the economy no longer needs highly accommodative policy, and that the Fed will use its tools to “prevent inflation from becoming entrenched”. These messages have been telegraphed repeatedly and well in advance, so they failed to spark a negative reaction during the trading session.
In his testimony, the central bank chief also acknowledged that it would take some time for interest rates to return to levels that prevailed before the pandemic and that policymakers haven’t made any decisions regarding balance sheet reduction, underscoring that it may take 2 to 4 meetings to reach a determination on trimming assets.
The market seems to have taken comfort from the suggestion that the tightening cycle will not be as aggressive as many began to fear in the wake of the FOMC minutes, but investors may be getting ahead of themselves in trying to front-run future policy actions, after all, the fundamental picture hasn’t changed overnight. That said, sentiment could shift again once Wall Street digests the latest inflation report.
Tomorrow morning, the U.S. Bureau of Labor Statistics will release last month’s Consumer Price Index data. Analysts expect December headline CPI to speed up to 7.0% y/y from 6.8% y/y in November, reaching its highest level since early 1982. The core gauge is also seen accelerating, likely increasing from 4.9% y/y to 5.4% y/y, a sign that inflationary pressures are broadening in the economy and are not driven solely by a few volatile categories.
KEY EVENTS FOR WEDNESDAY
Source: DailyFX Economic Calendar
A hot CPI report will raise wagers that the Federal Reserve will act quickly and forcefully to pullback support in order to curb soaring prices. As a result, the market could begin to price in a fourth hike for 2022 with more conviction and an earlier start to the balance sheet runoff. These expectations will put upward pressure on the Treasury curve, fueling volatility and weighing on expensive rate-sensitive stocks such as those in the technology and growth space. This means that the Nasdaq 100, but especially the ARKK Innovation ETF (ARKK), remain biased lower and that the recovery of the past two sessions may amount to a “dead cat bounce.”
ARKK TECHNICAL ANALYSIS
ARKK has rebounded off key support and is now heading towards technical resistance in the 89/90 range. If buyers manage to push the ETF above this barrier, the next upside target appears near the 100 psychological level. On the flip side, if selling activity begins to increase again and the price pivots lower, support is seen at 81.50/80.10. If bears breach this floor, ARKK will have few obstacles to retreat towards the 74.00 area in the short-term.
ARKK TECHNICAL CHART
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—Written by Diego Colman, Contributor