The stock market has seen its fair share of twists and turns over the past year. The S&P 500 started 2023 strong before falling through March. It then rose sharply through mid-summer before a painful pullback during October that left investors reeling, unprepared for the index's major rally since the fall.
While the stock's ups and downs have left many investors scratching their heads, they didn't surprise real money pro Carley Garner.
In April, he correctly predicted that the S&P 500 would rise; In July he accurately predicted that stocks would fall; Then, in November, he correctly said, “It's a bull market,” predicting a rally that has since lifted the benchmark index by nearly 1,000 points to more than 5,000.
The prescient predictions suggest investors may want to pay attention to Garner's latest thoughts on what could happen next for the tech-heavy Nasdaq 100.
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A stock market Rally Forever
The S&P 500's spectacular rally from its October lows surprised many because there was plenty of reason to worry.
While inflation eased from its peak of 9% in June 2022, it struggled again in late summer, leaving many to wonder if the Fed's inflation war was further from won than previously believed. .
Related: How soon until the S&P 500 surpasses 6,000?
The health of the economy was also uncertain, given negative gross domestic product in the first half of the year and year-over-year declines in S&P 500 earnings.
The potential for stagflation, an economy struggling without growth but experiencing persistent inflation, led many to think that a recession and lower stock prices were guaranteed.
As a result, the bearish trend became widespread. Investors able to generate 5% yields on short-term Treasuries flocked to them away from riskier stocks. Professional investors covered portfolios, purchasing unprecedented amounts of bearish puts, short interest in many stocks increased, and sentiment, as measured by several key indicators, showed extreme fear.
However, the overwhelmingly negative sentiment set the perfect stage for the rally we have experienced.
Outside investors, convinced that they would eventually be proven right in their bearish stance, were slow to buy, even as evidence accumulated that inflation had begun to trend downward again, clearing the way for rate policies. friendlier interest rates from the Federal Reserve.
Slowly and surely, and one by one, investors accepted, falling victim to the “fear of missing out,” or FOMO, and causing stocks to climb the proverbial wall of worry.
The S&P 500, buoyed by the biggest tech stocks including Amazon, Microsoft and Nvidia, has soared more than 20%, packing what are typically years of historic returns into a span of about six months.
Related: Analyst Who Predicted Nvidia Could Eclipse $700 Reveals New Target
The strength of these large-cap stocks was most evident in the returns of the Nasdaq 100, an index comprised primarily of the largest companies in the technology sector.
Since the October low, the Nasdaq 100 has risen more than 25% thanks to stocks like Nvidia, which has risen about 80% on optimism that skyrocketing spending on artificial intelligence would generate record revenues and profits for the selling its ai chips.
Nasdaq 100 reaches high levels
The market looks very different today than it did last fall, when Garner predicted that stocks were too oversold and a big rally was likely.
Instead of fear, you could say investors are feeling giddy. They have reversed bearish bets, replacing them with overly bullish bets using call options and leverage. Sentiment measures, such as survey responses, are warning signs, suggesting that many may be leaning toward higher rather than lower stock prices. For example, CNN's Fear Index has recorded “extreme greed” for most of the last month.
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Stock valuations have also risen to historically high levels. The S&P 500's price-earnings ratio is above 20, at levels that correspond with uninspiring stock market returns over the next year. The Nasdaq 100's P/E ratio is higher, above 25.
As economist John Maynard Keynes quipped: “Markets can remain irrational for longer than you can remain solvent.” However, the seemingly relentless advance of technology stocks caught up with Garner, prompting her to analyze What can happen to the Nasdaq 100? next.
Unfortunately for the bulls, Garner's outlook following his analysis is worrying. While Garner leaves the door open to higher prices, a review of Nasdaq 100 price charts since the dot-com bubble in 2020 leaves her cautious.
“If my memory serves me correctly, we haven't shared this monthly chart since late 2021,” Garner wrote. “At the time, we were concerned about the unhealthy, steep-sloping rally. Since then, the Nasdaq 100 corrected from just under 17,000 to just over 10,000, before recovering and hitting new all-time highs. However, those new “Highs are rising. Some warning signs.”
The red flag that worries Garner is that the NASDAQ 100 has risen to the upper end of a long-term resistance line dating back to 2000.
“The dotted black line represents a natural market slope on the monthly chart of the Nasdaq 100 futures market provided. It is easy to see that despite the digestion from late 2021 to fall 2023, the rally is still statistically ahead of as planned,” Garner wrote. .
QST/Carley Garner
Garner's technical analysis of the Nasdaq 100 price chart takes her to a trend line that could present a stagnation point for the rally “at just under 18,000.” Since we are at 17,962, there is little room to go higher.
“Is this trend line arbitrary? Maybe, but in my experience, simple lines drawn on a chart work much more often than they should,” Garner said. “Election years are generally good for markets, and the January barometer suggests that 2024, statistically, will be positive overall. However, a correction seems imminent.”
Related: A veteran fund manager picks his favorite stocks for 2024
