The first of 17 consecutive Federal Reserve interest rate hikes began June 30, 2004. So Tuesday’s decision to not raise rates came a little more than two years later. The day the rate hikes began, the Nasdaq closed at 2048. After Tuesday’s announcement, the Nasdaq ended trading at 2061. In other words, in the ensuing two-plus years, the Nasdaq essentially made no progress.

There certainly has been volatility during the past two years. But much of it has been confined to choppy, daily price movements within fairly tight ranges. Long trends have been non-existent.

Below is a chart that will help you see the situation more clearly. The black line shows the daily price movement. The red line marks the level of the Nasdaq when the Federal Reserve began raising interest rates two years ago. The green line is a support line. I believe it gives a clue about where the Nasdaq could be headed.

First I need to emphasize that I do not claim any special ability to forecast market movement and I don’t believe anyone else has that ability, either. The investment markets are influenced by so many fundamental and technical variables that it is impossible to account for the potential impact of every one. I do, however, believe that by carefully assessing fundamental, technical and cyclical factors it is possible to identify periods when market risk might be higher or lower than normal.

After throwing out a couple of cautions, I’m going to detail why I think the Nasdaq is likely to soon stage a rebound. The first caution is a seasonality issue. September is the weakest month of the year for market returns going back to 1926. It is the only month where the S&P 500 averages a negative return. October is the next weakest month, although it averages a gain of about a half percent. Certainly there is no guarantee that stocks will lose month over the next two months. But neither should this tendency be ignored.

The second caution is the political situation in the Middle East and already record oil prices. A single, unforeseen event could easily drive oil prices above $100 a barrel in just a day or two. That would sent stocks plunging and push the world economy to the brink of recession.

Now for the positive view.

• The economy remains strong. Although preliminary second quarter GDP figures showed a sharp decline from the first quarter, the 2.5% annualized rate is more in line with what the Federal Reserve wants.
• The Fed chose not to raise interest rates for an 18th consecutive session. The markets initially sold off on the news that Fed official were holding the line. While this might not be the end of rate hikes, additional increases will likely be few and far between.
• The overall economic picture isn’t too bad. Unemployment remains low. Corporate earnings for the prior quarter have generally been better than expected. By historical standards, mortgage rates are still low and the housing market has slowed but not collapsed.
• The current correction is already the steepest in two years. Now in its fourth month, the market seems to be forming a bottom. Unless this is going to turn into a massive correction, downside risk should be minimal and certainly less than it was four months ago.
• Seasonality again. The three strongest consecutive months for the broad market are November, December and January. If stocks can hold ground for a few more weeks, seasonal momentum should kick in.
• The S&P 500 and the Dow are both showing strength. Each is trending above 50 and 200-day moving averages and the Moving Average Convergence Divergence (MACD) for each is positive. Neither corrected as sharply as the Nasdaq and both have made substantial recoveries.
• The chart above. While the Nasdaq broke through support from the rising green trendline, it found support at the 2050 level marked by the red line. I expect it to bounce from this level back to the area of its most recent high at about 2300. That could happen in just a couple of weeks or it might take until the end of the year. And while the MACD for the Nasdaq is still negative, it is moving up and could quickly turn positive.
• When assessing overall market health, I like to look at the universe of Exchange-Traded Funds (ETFs) because they include virtually every market and industry sector. There are currently just over 300 ETFs. Over the past 30 days, half have had positive returns. That is much better than a few weeks earlier.

That’s how I see things right now. I don’t discount the possibility that the market could tumble again from here. I just think there are more reasons for it to go up than down.

I hope you all have a great weekend.