Nasdaq 100 Closes Flat Amid Higher Treasury Yields. Is the Santa Rally Over?

[MongiIG]

NASDAQ 100 OUTLOOK:

• U. S. stocks settle a touch higher on Wednesday, but bullish momentum seems to be fading
• Nasdaq 100 ends the day flat as higher Treasury yields limit the appeal of tech plays
• Investors appear to be rotating towards quality holdings, but it is too soon to draw major conclusions as low market participation during the holiday season may be skewing results

Most read: Six Popular Technical Indicators for Stock Trading

U.S. stocks settled a touch higher on Wednesday amid investor caution and lower liquidity ahead of the New Year’s holiday.

At the closing bell, the S&P 500 gained 0.15% to end the day at 4,793, slightly below the intraday high of 4,807 reached on Tuesday. Elsewhere, the Dow Jones rose 0.25 % to 36,488, a record close for the blue-chip index. Meanwhile, the Nasdaq 100underperformed the major benchmarks and was flat on the session, finishing at 16,491, contained by a sharp rise in U.S. Treasury rates, with the 10-year yield up7 basis points to ~1.55%, its highest level since November 29.

The Santa Claus rally, which drove the major averages to new or near record highs, appears to be losing momentum and running out of gas as investors begin to gravitate to quality holdings and become more defensive, but it is too early to draw serious conclusions, as low market participation during the holiday season can distort and cloud the underlying picture (for reference, trading volume hit its lowest level of the year on Tuesday).

Next week, when most traders return to their desks after the year-end vacations, we should have a clearer sense of overall sentiment and how stocks may trade in the early part of 2022. That said, omicron remains a wild card, but data suggesting that the heavily mutated variant is not as severe as previous strains create a bullish bias for risk assets. There will be a lot of pandemic-related information to digest in the coming weeks, but traders should pay less attention to new cases and focus on hospitalizations and deaths. If the latter two metrics stay low, consumer and business sentiment should improve, paving the way for stocks to charge higher, particularly the reopening names.

 

In the new year, Wall Street is also likely to become more preoccupied with the Fed’s monetary policy stance, more so after the FOMC accelerated its tapering schedule and signaled, via its dot-plot, that it will raise the federal funds rate three times over the next 12 months to counter inflation.

As the central bank lift-off approaches, stocks could come under pressure, especially expensive technology, and growth companies with exorbitant multiples. In general, higher borrowing costs undercut valuations by increasing the rate at which future cash flows are discounted, a conventional technique to price equities. Against this backdrop, the Nasdaq 100 may trade on the back foot in early 2022, but the more speculative corners of the market could take the biggest hit (ARKK, for example, is in a very precarious position).

NASDAQ 100 TECHNICAL ANALYSIS

The Nasdaq 100 has pulled back recently, and it is now sitting at support near the 16,450 mark. If sellers manage to breach this area, the index could retreat towards 16,200, before attacking the next critical floor near the 16,000 psychological level.

On the flip side, if bullish momentum picks up pace and the Nasdaq 100 pivots higher with conviction, technical resistance can be seen at 16,765, the record high. If buyers drive the price above this barrier, we could see a move towards channel resistance at 17,100 over the coming days.

 

NASDAQ 100 TECHNICAL ANALYSIS

Nasdaq 100 (NDX) chart prepared in TradingView

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Written by Diego Colman, Contributor, 30th December 2021. DailyFX