While the S&P 500 has been reaching new all-time highs, the Nasdaq 100 has been trading within a range, forming a symmetrical triangle pattern. This pattern, while not predictive of the Nasdaq’s next move, provides a useful framework for exploring potential future scenarios. The chart of the QQQ (Nasdaq 100 ETF) closely resembles the chart of Nvidia (NVDA), both displaying a consolidation pattern with lower highs and higher lows. Other leading growth stocks, like Meta Platforms (META), have yet to break out, leaving the bulls without a clear signal. Meanwhile, defensive sectors continue to thrive, even as the S&P 500 experiences consistent gains.
Let’s delve into four potential outcomes for the Nasdaq 100 over the next six to eight weeks, analyzing the market conditions that would likely lead to each scenario and assigning a probability estimate.
Option 1: The Very Bullish Scenario (10% probability)
Imagine a scenario where Nvidia (NVDA) breaks out to the upside, Meta Platforms (META) finally surpasses $550, and the rest of the Magnificent 7 stocks regain their leadership position. This could drive the Nasdaq and the S&P 500 to new highs within the next month. Perhaps Powell’s press conference next week will rekindle investor optimism and the market will price in a perfect soft landing for the economy.
Option 2: The Mildly Bullish Scenario (30% probability)
If the Magnificent 7 stocks continue to struggle and fail to break out, but other sectors like financials and industrials surge higher, we could see a less aggressive but still bullish rally. This would mean the QQQ would stay below its 2024 high, but stockpickers would rejoice as plenty of opportunities emerge outside of the growth sectors.
Option 3: The Mildly Bearish Scenario (45% probability)
What if the Fed meeting next week doesn’t go as planned, and investors start anticipating a recession? Defensive sectors have been performing strongly in recent months, and it wouldn’t take much to reverse the signs of optimism seen last week. Bonds might outperform stocks as investors adopt a defensive posture, and hopes for an October rally to overcome the bearish sentiment might fade.
Option 4: The Super Bearish Scenario (15% probability)
Every doomsday scenario needs to be considered, and this option involves a significant ‘risk off’ move for stocks. Growth stocks could experience a sharp decline, with risk-off plays like gold shining brightly as the QQQ retests the August low around $425. Perhaps Powell fails to boost investor confidence, and the ‘goldilocks scenario’ for the economy becomes a distant memory.
Consider these four scenarios and contemplate the macro drivers that could trigger each outcome. Identify the signals, patterns, and indicators that would confirm a particular scenario. Choose the scenario you believe is most likely and explain your reasoning.
Remember, each scenario could impact your current portfolio. How would you manage risk in each case? How and when would you adapt your investment strategies to this new reality?
Share your thoughts and vote for your most likely scenario in the comments!
