The Nasdaq 100 index has lost its bullish momentum in the past few days as concerns about the banking sector and US recession rose. The index retreated to a low of $12,725, the lowest level since March 28 of this year. This price is still ~21% above the lowest level in December.
Sell in May and go away?
Sell in May and go away is one of the most popular maxims in the financial industry. The thinking is that stocks and other financial assets tend to underperform the market during summer.
It is unclear whether American stocks will underperform in the next few months since odds of a Fed pivot remains significantly high. Such a pivot will be a good thing for the stock market. Historically, stocks tends to do well when the Federal Reserve is pivoting.
Still, some analysts believe that American stocks could retreat in the next few months. As I wrote here, Mike Wilson of Morgan Stanley warned that equities could dive in the coming months. He cited the overall weak earnings and the actions of the Fed. He wrote:
“Historically, when forward EPS growth goes negative as it is today, the Fed is cutting rates, not hiking. However, the Fed has been hamstrung by inflation, making this cycle a historical anomaly in this respect — ultimately a near-term headwind for equities, in our view, until an easing cycle begins.”
The biggest risk in the market is the Fed, which has been hiking interest rates during a period of stagflation. These actions have led to warnings of a recession in the US. In an interview with Tucker Carlson, Elon Musk warned about an economic depression.
Another big risk for the Nasdaq 100 index is that the US could receive a rating downgrade if politicians fail to reach an agreement on the debt ceiling.
Still, there is a likelihood that a Fed pivot, coupled with the Microsoft and Alphabet earnings will lead to more upside in the next few months.
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Nasdaq 100 index forecast
The Nasdaq 100 index formed a small double-top pattern at $13,210 this month. In price action analysis, this pattern tends to be a bearish signal, which explains why the index made a bearish breakout. The index remains slightly above the 25-day and 50-day exponential moving averages. It is slightly above the lower side of the ascending channel.
Therefore, at this stage, there is a likelihood that the index will retreat and retest the support at $12,560. A move below that level will signal that bears have prevailed and push it to the next support at $11,721.
In all, investors should be cautious about selling in May and going away since a move above $13,210 will mean more upside for the index.
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