Investor caution amid optimism

The S&P 500’s steady upward climb has been dramatically influenced by the Federal Reserve’s (Fed) hints at a possible pivot. This, combined with the robustness of the US economy, has fueled optimism among investors. With the unemployment rate near historic lows at 3.5% to 3.6% and Q2 2023 earnings surpassing expectations, market confidence has soared. However, amid this renewed positivity, prudent caution remains essential.  S&P 500 has failed to stay above 4565 levels.

Tech heavyweight stocks have taken the spotlight in 2023’s market rally, spearheading a surge that defied expectations. These stocks, including Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta Platforms, have driven the broader stock market rally and maintained reasonable valuations post Q2 earnings. As the market enters Q3, the question arises: Can these companies continue their momentum and uphold the uptrend in the coming months?

Surprising Market Rally in 2023

This year’s market rally has been surprising, defying conventional expectations, even amidst the Federal Reserve’s decision to hike interest rates. An extraordinary factor that fueled this surge is the remarkable growth of a few tech giants.

The Nasdaq ended last week with a 0.7% loss on Friday, a 1.9% loss for the whole week and a nearly 5% loss since the beginning of the month. This correction suggests that the tech behemoths are undergoing some profit-taking that began in early August after the impressive rally since the start of the year.

These companies have outshined others and significantly influenced this year’s 16.3% surge in the S&P 500 index. Notably, these stocks are already part of the widely recognized FAANG group, further highlighting their influential role.

Nasdaq 100 to Correct Further

The Nasdaq 100 has faced some downward pressure since early August. Nasdaq trades below 15500 what we think is the psychological resistance now. There is no higher volume selling and overall volume is light. The selling is orderly, but it is still selling. This is the time if you are looking for a more cautious buying opportunity.

The Nasdaq will have a great buying opportunity, but it might be best to stay aside for now. While recent losses could accelerate. Assuming another acceleration to the downside does not occur, or at least occurs in combination with higher volume, then the best course of action is to let this play out. A chance of maintaining an uptrend looks dim.

What we think

A full correction could take the index back to the 13200-500 range where we expect it to consolidate before buyers regain market control. However to expect the lows of about 10700 to be breached appears pipe dream unless severe overseas recessions make their effect felt in the US.

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