By Kelvin Wong
In July, the Nasdaq 100 was the worst-performing benchmark US stock index, where it recorded a monthly loss of -1.6% versus the S&P 500 (+1.1%), Dow Jones Industrial Average (+4.4%), and Russell 2000 (+10%).
In addition, the global synchronized risk-off behaviour that took shape in the past three weeks led to a larger drawdown in the Nasdaq 100 versus other US stock indices, as it plummeted by -16% from its July high to August 5, 2024 low as momentum-driven strategies trimmed their long positions on US mega-cap technology stocks that have a significant combined weightage in the Nasdaq 100.
Since the climatic sell-off seen in global stock indices on Monday, August 5, the implied volatility of the S&P 500, the VIX, has declined from a 52-week high of 65.73 to 16.20 on Wednesday, August 14, which has led to a return of risk appetite; the Nasdaq 100 rebounded by 9% so far from its August 5 low.
However, at least in the short term, three factors may pause the current rally seen in the Nasdaq 100.
The hard landing scenario alarm bell may ring again if US retail sales disappoint
Despite a soft July US CPI print released on Wednesday, August 15, that indicated the inflationary trend in the US continued its deceleration path, it did not yield its prior positive impact on the Nasdaq 100, as the Nasdaq 100 underperformed (almost unchanged) versus the S&P 500 (+0.38%).
Hence, the market seems to be more focused on economic growth-related macro data now rather than inflation risk due to the fear of a US recession or hard landing scenario that may be already in motion with the US Federal Reserve being late on embarking its interest rate cut cycle.
The next key US growth-focused data will be retail sales for July, which is out later today; so far it has been on a path of slower growth since the March print of 3.6%, but if the July number comes in lower than the 2.3% y/y recorded in June, it will be the fourth consecutive month of a growth slowdown in consumer spending, which may bring the recession, aka hard landing, scenario in the US back to the forefront again.
The volatility of implied volatility (VVIX) is falling at a slower pace
In the past two weeks since August 5, the implied volatility of the S&P 500 (VIX) has fallen, but the pace of the higher-order implied volatility of the VIX (VVIX) has declined at a slower pace than the VIX.
Therefore, the VVIX / VIX ratio has increased since August 5, which suggests that there is still a degree of uncertainty in the US stock market. Right now, the VVIX / VIX ratio is at 6.59 at this time of the writing, just a whisker away from a significantly high level of 6.77 that led to past multi-week and multi-month corrective decline sequences in the S&P 500; for example, from Jul 27, 2023 to October 27, 2023.
Hence, the risk of another spike in the VIX cannot be ruled out.
Short-term bullish momentum has waned in the Nasdaq 100
In the lens of technical analysis, the short-term bullish momentum of the minor uptrend phase for the Nasdaq 100 CFD (a proxy of Nasdaq 100 E-mini futures) has started to show signs of exhaustion via the recent bearish divergence condition flashed out by the hourly RSI momentum indicator at its overbought region.
If the 19,230 short-term pivotal resistance is not surpassed to the upside, the Nasdaq 100 CFD faces the risk of a near-term corrective decline to expose the intermediate supports of 18,680 and 18,435/310.
On the flip side, a clearance above 19,230 invalidates the bearish scenario for the continuation of the uptrend phase for the next intermediate resistances to come in at 19,600 and 19,900.
Dean Popplewell
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
