The Nasdaq rally is dead! Long live the bull market!

The US June CPI data has certainly put the cat among the investing pigeons!

If, like me, the first US index you check in the morning is the Nasdaq, then you would have likely choked on your Weetbix! The 2% decline in the Nasdaq is of course far less important for me as a technical analyst than that bleeding great big black candle.

Black candles indicate excess supply during a trading session, and if they’re big enough, and if the close is at or very near the low – they can indicate the grappling of supply-side control. This means big black candles are not to be trifled with, and generally further declines are in store.

Big black candle on the Nasdaq

Obviously we need to put Thursday’s big black candle on the Nasdaq into perspective – it has had a tremendous run. Nothing goes up in a straight line, and to be fair, even accounting for the aforementioned candle, there’s been very little downside volatility here.

Whilst it would not surprise me to see the balance of demand and supply switch more to the supply side for a short period of time for Nasdaq stocks – it would surprise me even less to see it rebound quickly and resume the prevailing long term uptrend. (The most likely near-term downside target is the short term uptrend ribbon i.e., the light green zone).

The Nasdaq rally is dead! Long live the bull market!

You might have noticed that the huge run up in the Nasdaq has hardly coincided with a similar move in the S&P/ASX 200. Instead, our benchmark has been trading sideways in a range defined by the 2 April peak of 7911 and the 19 April trough at 7492. Yes, there’s been a very gradual upward trend over this period, but emphasis on the word gradual!

ASX200 finally has the inspiration to break to new highs

Today we’re finally breaking to new highs despite the Nasdaq’s temporary demise. We don’t have any of the mega-tech stocks that have powered the vast majority of the Nasdaq’s and the USA’s benchmark stock index, the S&P 500’s, gains.

S&P500 chart

We’ve all heard the saying that when the US stock market sneezes, the Aussie market gets a cold. So, if you can’t use the Nasdaq and the S&P 500 as a proxy for local shares, what can you use?

My tip is this: If you’re looking for a US stock index that best corresponds with the local bourse’s fortunes, you’re much better off looking at the Russell 2000 (“RUT”).

Don’t get me wrong, for many years, the Nasdaq Composite (“Comp”) has served me well. It contains nearly 5,000 US stocks, and therefore is the broadest US stock index available. You want breadth when doing your index-level analysis. You want to see what most of the stocks in a market are doing.  This is why I’ve never used the S&P 500 (even though it’s the benchmark) – too narrow and only focuses on big caps.

I also like the Comp because traditionally it also contained the most interest rate sensitive stocks, and those most sensitive to US economic growth. Rates move markets. The Comp for me has always been a forward indicator of the US economy.

But that’s the old Comp. Over the last few years, it has increasingly been dominated by a narrowing group of mega-cap stocks that don’t necessarily (or to a lesser extent) represent what’s happening with US rates or with the US economy.

The RUT contains (as the name suggests) 2000 small cap US stocks. When I say smaller cap, the largest stock in the RUT would sit at number 8 in the list of Aussie stocks – so it’s a bit of apples and oranges! But, the next biggest stock is about a third the size of the first, and they trundle away pretty quickly from there.

Basically, the biggest stocks have less of an influence on the RUT’s performance relative to the Comp and the S&P 500, and it's still broad with those 2000 stocks, and given they’re smaller in size – we’ve still got plenty of sensitivity to US rates and the US economy. Arguably, the RUT is the best representation of the heart of corporate America you’re going to get.

The table below sums up why in my opinion, the RUT is a much better proxy for the US stock market than the Comp.

Table: Russell2000 vs Nasdaq Composite Top 10's by Market Cap

Why the ruckus and what do the RUT’s technicals mean for the ASX?

As you would have likely already heard, the US June CPI was better than expected. It showed prices fell…yes fell in the US economy by 0.1% last month. This was better than the +0.1% forecast by economists.

Headline inflation in the US is now 3% p.a. and while still above the Fed’s target of 2%, appears to be steadily tracking in that direction. Core CPI (stripping out energy and food components) was +0.1% in June and 3.3% p.a., also below expectations.

Monthly US CPI. Source: Forex Factory, Fair Economy

The data has led to several major brokers calling for the Fed to commence cutting its official cash rate at its September meeting. As we can see from market pricing, a September cut has grown from a likelihood at 76.6% probability yesterday, to a near-lock at a 99.2% probability today. Note also, the pricing for a second cut has swung to better than 50-50 for November from just 24.4% previously.

Market pricing is converging on a September cut as a certainty. Source CME

As for the RUT’s technicals. They look very encouraging to me. For starters, there’s the large white candle in yesterday’s price action – the exact opposite of what occurred on the Comp.

White candles indicate excess demand, and assuming they also close at or near the high, demand-side control. The bigger the candle, the bigger the showing of demand-side control.

Russell 2000 chart

Even more impressive in the RUT chart is the gap between Wednesday’s high and Thursday’s low. A gap indicates a sudden shift in market sentiment, and correspondingly in the balance between demand and supply. Here, the CPI data has triggered a wall of demand on the open that could not be met by supply at lower prices.

Thursday’s price action is often called a “gap and run” and it is particularly bullish. I have highlighted on the RUT chart a few recent moves of a similar nature. 

There are some potential sticking points on the RUT chart, however. I note that while it closed at a record high, there is still the 28 March high of 2135.5 to deal with, and this coincides (but was not a coincidence) with the major March 2022 peak of 2138.5.

I suggest that a close above 2138.5 is required to signal the recommencement of the RUT bull market – and therefore signal the beginning of the next leg of the real US bull market (not the narrow Comp and S&P 500 one!).

With any luck, a broad US bull market would provide a better backing for our own potential next bull market leg than any continuation of the Comp rally could. I suggest if all goes well, we should be trading with an 8-handle on the S&P ASX 200 soon, and fingers crossed, a decent foray into the 8’s from there! 🤞

---

Stay up to date with all of my latest technical analysis for the ASX 200 and other major global stock indices, along with major commodity and bond markets each day in the ChartWatch section of the Evening Wrap.