Nasdaq 100 forecast: Stocks drop ahead of busy week

Technology stocks have finally given back some gains, causing the tech-heavy Nasdaq 100 to relinquish a good chunk of gains it made earlier in the month. At the time of writing late in the day on Friday, the Nasdaq 100 was off by around 1.7%, weighed down by Amazon (-2.8%), Meta (-2.5%) and Nvidia (-2.7%), among other big tech fallers. Our Nasdaq 100 forecast is modestly bearish in light of the recent price action and due to the reasons discussed below. The week ahead is set to be a big one.

What is driving markets lower?

Well, various factors, including profit-taking.

Friday’s Core PCE data failed to reduce fears over "higher for longer" narrative on interest rates, ahead of a busy week for economic events. Risk appetite is also waning amid a lack of major fresh bullish catalysts. People are happy to book profits after what has been a strong year so far in the tech sector. We have also seen some insider selling in big tech firms like Nvidia, which one cannot ignore – see below.

The market is growing increasingly worried about the potential for prolonged elevated interest rates, both in the US and globally. While there's no panic yet, it's becoming more difficult to justify continued share purchases without new catalysts.

For months, the stock market rally has been driven by strong demand for technology shares, bolstering indices like the Nasdaq 100 and S&P 500 despite weaknesses in other sectors. However, technology shares now appear overextended, suggesting a correction may be on the horizon. After months of substantial gains and no new bullish catalysts, a correction wouldn't be surprising.

Video: Nasdaq 100 analysis and insights on S&P 500

Nasdaq 100 analysis: Nvidia insider selling

With technology stocks at extremely elevated levels, there is no surprise to see corporate insiders such as officers, directors and any beneficial owners of more than 10% of a class of the company’s equity securities, booking profit. This should not be confused with inside information. An insider trading activity happens when corporate insiders trade in stock in their own companies, which is public knowledge. Anyway, we are seeing more and more insider selling in big tech firms like Nvidia, which one cannot ignore. However, this does not necessarily mean the stock is about to crash. Insider selling could be for any reason, including to raise funds for other, personal, endeavours.

Source:

https://www.nasdaq.com/market-activity/stocks/nvda/insider-activity

Before discussing the macro factors to watch in the week ahead, let’s take a look at the Nasdaq 100 chart first.

Nasdaq 100 forecast: Technical levels to watch

Source: TradingView.com

The Nasdaq 100 has broken its 21-day exponential moving average to provide us with a clear short-term bearish signal. This is further amplified by the fact the index has moved back below the old all-time high of 18466 that was hit in March. This level is now the most important resistance to watch moving forward. The short-term path of least resistance will remain to the downside for as long as we don’t cross back above this level or witness a bullish reversal pattern at lower levels first.

On the downside, potential supports come in around 18250, followed by 17821 – the latter being the high point from end of April, before we saw a breakout in early May. Longer-term support is in the shaded region on the chart, between 16768 to 16970, where the 200-day average and highs from 2021 and 2023 meet.

Looking ahead: ECB, BOC and NFP

The week ahead is busy with lots of key data releases.

Among the US macro pointers, we will have the latest ISM PMI surveys from the manufacturing and services sectors, as well as JOLTS Job Openings, ADP private payrolls and jobless claims data. But the key highlight is on Friday, June 7, when the May jobs report is published.

The Fed has indicated it is willing to wait until the summer ends before potentially cutting interest rates. Friday’s jobs report and wages data should provide further clues on that front, as too will the other key US data highlights mentioned above.

In recent weeks, we have seen bond yields rise, with investors growing increasingly worried about the possibility of interest rates staying elevated for a longer period. If that sentiment changes, say because of a run of below-forecast US data, then that is something that may provide stocks renewed support again and undermine the US dollar.  However, if data remains super-hot, then this may, paradoxically, weigh on risk sentiment as rate cut expectations are pushed further out.

Meanwhile, on Thursday, June 6, the European Central Bank is expected to deliver its first rate cut of the year. The key question is how many more will follow, if any? High wages pressures and improving macro data in the Eurozone presents a major dilemma for the ECB ahead of its rate decision. However, a 25-bps rate cut may go ahead anyway given that the ECB has built it up so much. If the ECB then decides not to pre-commit to further loosening this year, then that’s something that would probably more than outweigh the rate decision itself.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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