Forecast correction levels: The NASDAQ
Both our external forecasting data along with our own modelling data suggest that the NASDAQ 100 is 39.31% overvalued compared to its Primary Support Valuation Level(Yellow Line). Because of the Type of shares the NASDAQ 100 represents we have seen a significant increase in its value with estimates suggesting the index has risen by as much as 115.92% (2179 points) since 2010.
Primary Support Valuation Level(Yellow Line):
As we can see from the 1998 to 2002 communications bubble traditional market fundamentals driven increases to indexes tend to be short and sharp creating spires rather than mountains, and then returning to within the Forecast stable range.
However because of the fact that the increase we have seen within the NASDAQ since 2010 is not market driven but is instead caused by the Federal reserves Loose Monetary Policy and its method of slowly pumping in vast quantities of cash into the US financial system the increase has taken place over a considerably longer period of time (4 years instead of 2).
Because of this elongated growth in the US money supply combined with the sheer quantity of it ($4 Trillion USD) we are likely to see the federal reserve take a similar length of time if not longer to remove this Capital from the system.
As a result we would expect the NASDAQ to see a staged decline of around 39.31% (1647 points) over the next 4-6 months as it heads back towards Support Valuation Level (Yellow Line) of 2398 points.
Primary Trading Range
Due to the significant size of the expected drop within the NASDAQ during the initial few months of QE reduction, we would expect to see the NASDAQ establish a temporary Primary Trading range of between 2398 (Yellow Line) and 1878 (Red Line) for around a further 4-8 months. As once the initial market shock caused by the Federal Reserve beginning to move away from their Near Zero Interest Rate Policy towards cutting QE in the market has been absorbed the index is likely to somewhat stabilise whilst the process continues.
We saw exactly this behaviour during QE tapering where the markets saw a consecutive significant adjustments after the first few Federal Reserve Federal Open Market committee Meetings where the FOMC introduced and then continued the Policy of tapering. After the initial couple of market shocks the the index returned to its upward climb driven by NZIRP and Margin debt.
This suggests that we are likely to see similar monthly falls in the index whilst it manages to avert significant month-on-month decline until QE has been reduced significantly.
Forecast Stable Range (Red to Black Lines)
Similarly to the DJIA the NASDAQ 100 has a clear and viable Forecast Stable Range, that it has maintained since 1998. all the way up to 2011.
Upon US Quantitative Easing being removed from the Market and the level of margin debt within the index has readjusted back to a viable levels, we would expect to see the index return to within this trading range, with the Secondary Support Valuation Level (Red Line) of 1878 representing the upper demarcation line within the NASDAQ 100s Stable range. Whilst our modeling data suggests that the minimum Support Valuation Level (Black Line) may be as low as 1182 given the NASDAQ’s historic reticence to pass below or remain below this level.