Nasdaq 100 rally shows signs of stalling

SINCE early November, the Nasdaq 100 index has seen a notable pullback of around 6 per cent as at the time of writing last week, driven primarily by anxiety surrounding the artificial intelligence (AI) trade and a recalibration of Fed rate cut expectations.

Names in the AI trade were a source of recent pressure, with a steady stream of negative headlines stoking fears of a bubble in the sector. Famed short-seller Michael Burry roiled the market with recent regulatory filings disclosing his fresh wagers against AI favourites Nvidia and Palantir, with purchases of put options in the third quarter. In addition, he accused the “hyperscalers”, which are the major cloud and AI infrastructure providers, of employing aggressive accounting to understate depreciation expenses to artificially pad their earnings growth. Furthermore, leading investors SoftBank and Peter Thiel have recently sold their entire stakes in Nvidia, dampening market sentiment in the AI sector.

Apart from the cool-off in AI trade, the recent lengthy US government shutdown has also weighed on the rate-sensitive index. Investors worry the economic data blackout will delay or even derail rate cuts as it complicates the Fed’s ability to make data-dependent decisions. Rate cut expectations at the December meeting have cooled substantially, with Fed funds futures traders currently pricing roughly a 45 per cent chance of a rate cut, down from over 90 per cent a month ago.

From a technical perspective, investors should exercise caution as the current Nasdaq 100 rally shows signs of stalling after recent breakdowns of key support levels. The index broke down its mid-May uptrend channel support signalling a shift in momentum to the downside in the near term. This was also confluent with a breakdown of the 50-day simple moving average (SMA), which had been holding as a dynamic support. Should the market extend its pullback from the current price weakness, the previous record resistance level in February at around 22,100 points would likely hold as a strong support. This level is confluent with the 200-day SMA, a key long-term dynamic support level, as well as a 38.2 per cent Fibonacci retracement level using the swing low of 16,542 points formed on Apr 7 and the swing high of 26,182 points formed on Oct 29.

In conclusion, the current drawdown for the Nasdaq 100 is likely to persist in the near term with a breakdown of key support levels amid a pullback in the AI trade and reduced Fed rate cut expectations. The 22,100-point level would likely hold as a strong support should the pullback extend to that area, given a confluence of technical signals.

The writer is senior research analyst, Phillip Securities Research