Powell’s Hawkish Comments Shake Equities
Ten days after the election, the sugar high and animal spirits appear to be finally wearing off. Tech stocks and the Nasdaq 100 Index ETF (QQQ) finally encountered some heavy selling pressure after comments from Federal Reserve Chairman Jerome Powell earlier in the week. Powell said, “The economy is not sending signals that U.S. central bank needs to be in a hurry to lower interest rates.” Investors must understand that markets are driven by liquidity, especially from the Federal Reserve. Nonetheless, considering the roaring rally since the presidential election, Powell taking the foot off the dovish gas pedal is not surprising. With stocks up 5% last week, some profit-taking is expected. Below are 5 more reasons stocks will likely to find support:
1. Technical Confluence Zone
The price action illustrates that QQQ is retreating to a high-probability buy zone, which includes a retest of the breakout and $500 round number, a daily price gap fill, and the rising 50-day moving average.
Image Source: Zacks Investment Research
2. OPEX
Friday is options expiration. Often, stocks trade funky on options expiration days as traders reposition.
3. Healthy Breadth Under the Hood
The major sometimes tell a partial story regarding market health. In order to get the full story, market participants must check breadth (participation). Though the major indices faded hard, only ~60% of stocks were lower for the session. Though markets were down, leading stocks like Tesla (TSLA), Coinbase (COIN), MicroStrategy (MSTR), and Root (ROOT) were up.
4. Dramatic Sentiment Shift
This week, the “CNN Fear & Greed” indicator showed that sentiment plunged from “Greed” to “Neutral” levels. Savvy investors use sentiment as a contrarian indicator.
Image Source: CNN
5. Seasonality
Historical seasonality suggests that markets tend to retreat into Thanksgiving week before rallying into year-end.
Bottom Line
Friday’s market swoon may seem intimidating on the surface. Nevertheless, several pieces of evidence, including the QQQ chart, sentiment, and seasonality suggest that the downside will be limited.
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