How high can the S&P 500, Nasdaq 100, Russell 2000 and Dow fly?

Where to next for US equities following the US Fed’s 25 bps rate hike?

Now that the US Federal Reserve (Fed) announced its widely anticipated 25-basis point rate hike and raised the fed funds rate to 4.50%-4.75%, can US equities build on their strong January gains?

The Fed Chairman Jerome Powell mentioning the word “disinflation” several times in his comments on Wednesday led to a renewed bout of risk-on sentiment, despite saying that US rates would need to rise further and won’t come off again this year.

US equity indices such as the S&P 500, Nasdaq 100, Russell 2000 and Dow Jones Industrial Average (Dow), who started the year on the back foot compared to their European counterparts which surged ahead from the very beginning of January, finally caught up and are seen steaming ahead.

Year-to-date chart of major US and European equity indices

As can be seen on the above chart, with the exception of the Dow, all other major US equity indices are now outperforming the Stoxx Europe 600 index, some, like the Nasdaq 100 and Russell 2000, by around twice as much.

According to the Bank of America (BofA) Global Fund Manager Survey, with asset allocators being the most underweight US stocks since October 2005, a huge amount of money may still flow back from bonds into equities, especially if the Fed is starting to talk about disinflation.

Technical view on the S&P 500, Nasdaq 100, Russell 2000 and Dow

S&P 500

The S&P 500 accelerated to the upside and is in the process of testing its September and December highs at 4,139 to 4,155 which represent key resistance. If overcome on a daily and ideally this Friday, after the US non-farm payroll data, weekly closing basis, the August peak at 4,325 would be next in line. En route lies the late August high at 4,215.

Minor support can be found between the early December and January highs at 4,101 to 4,094 below which the breached one-year downtrend line can now be found at 4,037.

While Tuesday’s low at 3,994 isn’t being slipped through, the 2023 uptrend remains intact.

Nasdaq 100

In case of the Nasdaq 100, a bottom has already been formed with Wednesday’s close above the November and December highs at 12,084 to 12,258, with the September peak at 12,902 being next in line, followed by the August peak at 13,722.

This bullish view will remain valid as long as Tuesday’s low at 11,817 isn’t being slipped through or a clear bearish reversal signal is being given by the index.

Russell 2000

The Russell 2000 so far this year is the big US outperformer with an over 13% year-to-date advance alongside the Nasdaq 100’s 16%, rapidly taking the index back to the psychological 2,000 mark and its August peak at 2,026. If bettered, the March peak at 2,140 would be eyed next.

The index will remain short-term bullish while it stays above this week’s low at 1,877.

Dow

Only the Dow Jones Industrial Average is underperforming and is finding it difficult to advance, having on Wednesday failed around its January high.

The index continues to range trade within its 34,941 to 32,474 December extremes but does remain short-term bullish while this week’s low and the October-to-February uptrend line at 33,512 to 33,490 underpin on a daily chart closing basis.

Having said that, a rise and daily chart close above the January and February highs at 34,346 to 34,348 needs to be seen, for the December peak at 34,941 to be back in the frame.

Failure at this week’s low at 33,490 would have short-term negative implications.