As 2024 draws to a close, the discussions surrounding the U.S. stock market have intensified, especially concerning the future trajectory of the Federal Reserve’s monetary policy. The prognosis is stark; after years of a dovish stance characterized by low interest rates and supportive measures, we are witnessing indications of a paradigm shift toward normalization. This transition could have significant implications for markets, particularly for high-growth sectors like technology. The Nasdaq 100, once a beacon of unrelenting bullish momentum, is now grappling with increasing headwinds, casting doubt on the possibility of a year-end “Santa Rally.”
The Nasdaq 100 has recently seen a decline in momentum, a troubling sign after reaching a record high of 22,133 on December 16. Following the release of the Federal Reserve’s dot plot earlier in the week and comments from Fed Chair Jerome Powell, market sentiment took a downturn. The Fed’s indication of fewer interest rate cuts in 2025 due to resurfacing inflationary pressures rattled investors, suggesting that the era of easy money could be ending.
With soaring expectations fizzled out, the index plummeted approximately 4% in the days following the FOMC meeting, among the weakest performers in major U.S. indices. The overall signs point to an unsettling phase where investors must remain cautious. The Russell 2000, S&P 500, and Dow Jones Industrial Average experienced declines as well, but the Nasdaq’s high beta nature amplifies its volatility in response to shifts in monetary policy.
Diving deeper into the technical analysis, several indicators reveal a concerning outlook for the Nasdaq 100. Recent data indicates that the percentage of component stocks trading above their 20-day and 50-day moving averages has dropped significantly. The statistics show that as of December 19, only 9.9% of Nasdaq 100 stocks were above the 20-day moving average, while merely 33.7% topped the 50-day benchmark. This divergence raises alarm bells; while the Nasdaq overall reached new heights, the underlying breadth of support beneath that rally has evaporated.
Moreover, after a bullish breakout earlier in December, the Nasdaq 100 appears to be retreating back within the boundaries of its long-term trends. The fresh corrective action marks a potentially pivotal moment. It is critical to note that the index is currently testing a crucial support level at 20,790, which has historically acted as a key intermediary threshold.
The significance of the 20,790 level cannot be overstated. Recent readings from the daily Relative Strength Index (RSI) suggest that this support could be weak, as the index has broken below an ascending trendline and dipped under the neutral 50 threshold. A daily close below this level would likely catalyze a more considerable corrective sequence, exposing lower support levels around 19,840 and 18,310. Such a decline would not only pose challenges for the Nasdaq 100 but could also exert downward pressure on broader market indices.
As market participants analyze trends, one worrisome signal includes the lagging number of new 52-week highs among Nasdaq stocks. The 10-day moving average of the difference between new highs and lows has formed a lower peak since November, further reinforcing the notion of deteriorating market strength.
Despite the negative outlook, it is essential to identify potential resistance levels that could signal a recovery. To negate the bearish scenario, the Nasdaq 100 would need to surmount the 22,470-22,980 resistance zone. Should it achieve this, momentum could shift once more, opening the pathway to higher targets, including 23,980, 24,440, and even up to 25,080.
However, without such bullish indications, the possibility of entering a protracted corrective phase remains. It is crucial for investors to sift through the noise created by market fluctuations and to base their strategies on robust technical and fundamental analyses.
As we close out 2024, the transition from a dovish policy perspective to a more restrained approach by the Fed has instigated a volatile environment for the Nasdaq 100. The combination of weakening momentum, plummeting breadth, and critical support testing suggests that the index faces significant challenges ahead. The potential for a multi-week correction looms larger than before, making it paramount for investors to remain vigilant.
With the fate of the Santa Rally in the balance, market participants must navigate the choppy waters of changing economic indicators and evolving Fed policies as they position themselves for the new year ahead.