The Nasdaq is up a robust 31 per cent year to date in 2019 with less than one month left in the year. This is the best return since 2013 and foreshadows a rally in 2020. Strong economic data and low-interest rates create a backdrop where investors could expect additional gains for the Nasdaq. US yields are also low, and there is very little concern that inflation will rise to the point where the Fed will begin to increase interest rates. The technicals are positive, and a break to fresh all-time highs could lead to another 10-15 per cent increase in the Nasdaq in 2020.

Despite the positive backdrop, risks remain. Trade has been a cloud that could further weigh on global growth. In this article, we will analyse the performance of the index and take a closer look at Nasdaq 100 forecast for the next year.

Nasdaq predictions: is goldilocks US economy good for the index?

The November data was mixed, which is helpful to riskier assets. Mixed data helps generate a goldilocks trading environment. If the numbers were very strong, yields would surge and would begin to cap upward momentum in stock prices. Traders could become concerned that the Fed would begin to tighten interest rates.

While manufacturing and services surveys produced by the Institute of Supply Management (ISM) came in weaker than expected, the jobs data continues to impress. Jobless claims fell to fresh eight-month lows and the Non-farm payroll report for November surprised to the upside.

November nonfarm payrolls surged by 266,000 and the unemployment rate fell to 3.5 per cent, according to the Labour Department. Expectations were for payrolls to come in at 187,000 and the unemployment rate to come in at 3.6 per cent. The payroll numbers were the best since January of 2019. Some of the gains were because General Motors workers came back from a lengthy strike. This boosted employment by 54,000 in manufacturing.

The Fed will eye hourly earnings as labour gains are key metrics the Fed uses when determining inflation expectations. According to the Labour Department, average hourly earnings rose by 3.1 per cent year over year while the average workweek held steady at 34.4 hours. Expectations were for average hourly earnings to rise by 3 per cent.

There were also upward revisions to the jobs data. September’s estimate went up 13,000 to 193,000 and the initial October count increased by 28,000 to 156,000. Those changes added 41,000 to the previous tallies. The unemployment rate of 3.5 per cent, down from 3.6 per cent in October, matches the lowest jobless rate since 1969.

Nasdaq 100 analysis: How has it performed after gaining 25 per cent?

Understanding the Nasdaq historical returns can help you determine the future direction of the index. Over the past three decades, the Nasdaq has averaged approximately 14 per cent per year annually. This compares to an average annual return on the S&P 500 index of 9 per cent. An interesting statistic that provides a future market trend is how the Nasdaq performed following a 25 per cent plus rally in the index the year prior.

Since 1990, the Nasdaq increased 25 per cent or move 7-times – the average rally the following year was 22 per cent. If we remove the outsized 85 per cent rally that occurred in 1999 (the dot com boom), then the average return following a 25 per cent rally is a solid 12 per cent. In 6 of the 7 years, the Nasdaq moved higher.

The graph of the annual percent returns of the Nasdaq shows that strong momentum is generally followed by decelerating momentum, but rarely a selloff, except most recently as the Nasdaq declined in 2018. What is also interesting is the deceleration continues into the following year. If history were to hold true, the Nasdaq would continue to rally another 12 per cent, and continue to decelerate in 2021.

Risks remain

The US and China are in talks to finalise phase one of a trade deal as 15 per cent tariffs on $165 billion in Chinese imports are set to kick-in on December 15. While the two sides are close to a deal, President Trump is also ready to walk away according to Economic Advisor Larry Kudlow. While there are no arbitrary deadlines, December 15 is a very important date with respect to future tariffs.

Nasdaq stock analysis: the technicals

The weekly chart of the Nasdaq 100 shows that prices are hovering just below their all-time highs. The rise from the 2018 peak to the 2019 peak is approximately 10 per cent, which could be a reasonable target on a breakout. Prices touched the 10-week moving average in December of 2019 and were rejected. Additional support below the 10-week moving average is the 50-week moving average at 7,552.

The Nasdaq is overbought. The fast stochastic is printing a reading of 93, above the overbought trigger level of 80, which could foreshadow a correction. The last time the fast stochastic had this reading this high on a weekly basis, prices continued to trend higher and allowed the fast stochastic to retest the highs near 99.5, before turning lower and eventually correcting. This could mean there is further room to run.

Momentum, as reflected by the MACD (moving average convergence divergence), is positive. The MACD histogram is printing in the black but the trajectory is beginning to decelerate. The MACD line generated a crossover buy signal in late October. This occurs as the MACD line (the 12-week moving average minus the 26-week moving average, crosses above the MACD signal line (the 9-week moving average of the MACD line).

Nasdaq 100 forecast: take away

The outlook for the US economy is positive, but the risk remains as trade negotiations could continue to generate volatility. Strong US growth might embolden President Trump to walk away from the trade table, which could eventually create a contraction in US growth. Global growth, which will provide the next leg up in US growth, will not likely occur without a trade deal.

Interest rates will likely continue to rise especially if US job growth remains stable. Historically, the Nasdaq generally rises in a year following a large upswing in stock prices, averaging approximately 12 per cent annually. The technicals point to a continued rally especially following a strong job number which could lift the Nasdaq to all-time highs.

FURTHER READING: Facebook share price forecast 2020 and beyond

FURTHER READING: Goldman Sachs stock market outlook: Seven interesting things we learned