Interest Rates Will Determine The Nasdaq’s Next Move (NASDAQ:QQQ)

Interest rates on the ten-year surprisingly broke out to the upside after the Fed’s decision last Wednesday to leave rates alone. Rates bolted higher because the dot plot showed one more probable rate hike this year and then a long pause well into 2024 until a possible rate cut. The Fed does not have to follow its dot plot, but the market trades on it in the meantime, however.

The chart below shows the breakout on the ten-year yield (US10Y) last week. This is a very unexpected development. The ten-year was up another 10-basis points on Monday to 4.54%. Maybe the Friday budget showdown is also part of this sudden spike in rates.

Rates had run into technical resistance in the 4.35% area early last week and looked like they would hold. Instead, they spiked up by 13-basis points on Thursday and hit a 16-year high of 4.48%. This caused a big selloff in the longer-duration, high P/E stocks.

This area of the market had a really tough week, as it was not expecting this sudden spike in rates. Consider that the ARK Innovation ETF (ARKK) fund was down 9.9% this past week. Cathie Wood’s fund is extremely sensitive to interest rates. It is long-duration in nature and high P/E.

The Nasdaq (NASDAQ:QQQ) was down 3.3% for the week, the S&P 500 (SP500) was down 2.4%, and the Dow Jones Industrials Average (DJI) was down 1.9%. Believe it or not, the DJIA is now only up 2.45% year-to-date. The S&P 500 is now up 13.2% YTD, while the Nasdaq is up 26.8%.

It was falling rates from October of last year until early July of this year that drove the Nasdaq higher. But now, it is rising rates that began in late May that have brought the Nasdaq to a standstill.

It will obviously take rates to go down to get the Nasdaq going up once again. As you can see from the chart below, rates can go higher from a technical point of view. They got clear up to 5% back in June of 2007. But that is a 20-yr chart that you are looking at.

The bond market currently looks really oversold to me and could be due for a turnaround soon. It had a nice little rally last Friday after reaching extremely oversold territory on Thursday. Interest rates need to settle down.

(Has the Bond Market bottomed?)

The market has also been fighting rising oil prices as they are inflationary, and they could lead to another rate hike by the Fed. There are still two more Fed meetings this year. Oil prices look like they are now running into technical resistance and are now stalling out in the low $90 area. A drop in oil prices would also help the stock market.

Another factor that has hurt the market has been a strong dollar. The dollar has been going up since early July, while the market has been going down. The dollar looks like it, too, is now running into resistance.

Click to enlarge

We now seem to be at an inflection point in the market. The bond market looks very oversold, interest rates have become way too high, and oil prices are finally leveling off.

The Nasdaq has pulled back to its support level, and it looks very oversold here. In our article about the Nasdaq last week, I said that current earnings expectations will support the index getting back to its old all-time high of 16,214 by mid-2024. I stand by that projection again this week, but we need to get interest rates to settle down.

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