Price action
QQQ continued its ball underwater bounce from the 5 August low, rising +5.5% during the week and +12.5% from the bottom. Tuesday brought an O’Neil follow through day as QQQ broke through the declining trend line resistance from the July high, evidence that buyers have reclaimed control. Benign inflation data and encouraging consumer data helped the move along. QQQ is now in a resistance zone c475/50dma. Can we go for a retest of the highs, or do we need to consolidate the move?
Note the steep channel up from the 5 August low is intact. It is clearly observable on the 30 min chart. Look out for a break of this channel if QQQ pauses to consolidate.
Realised volatility, as measured by the 14d ATR may be rolling over, which is a constructive sign.
The Fed
At the 31 July Fed day presser, JPowell explicitly teed up a cut for the September FOMC meeting. Since then, Fed speakers have followed his lead, emphasising a switch of priority from the inflation mandate to the jobs mandate.
Bostic (Tue): balance of risks level, recent data gives more confidence inflation is heading to 2%, wants to see a little more data, willing to wait for first cut but it’s coming, expects a cut by year end.
Goolsbee (Wed): climbing unemployment may indicate worsening job market, more concerned about jobs side of mandate, policy is very restrictive, economy not overheating.
Bostic (Thu): open to September cut as inflation cools, need to be conscious of maximum employment mandate.
Musalem (Thu): MP restrictive, inflation has returned to 2% pathway, recent inflation data increases confidence, time may be nearing for policy change, economy growing, data does not support idea of a recession, focused on both sides of mandate.
Goolsbee (Fri): when labour market turns it tends to worsen quickly, some leading indicators are flashing recession warnings, small business defaults picking up, unemployment up, signs for caution, impact of previous hikes not felt yet, you do not want to tighten any longer than you have to, economy not overheating.
Note how Goolsbee, one of the most dovish FOMC members, is the first speaker we have heard explicitly raise concern about recession. However, retail sales data on Thursday suggest the US consumer is still in decent shape (source: bloomberg.com):
Walmart’s earnings report was also encouraging about the US consumer (source: WSJ.com)
The next significant Fed event is JPowell’s speech at Jackson Hole on 23 August, which will bring further guidance about the long-awaited cutting cycle.
What did we learn about markets?
This week’s price action is consistent with the hypothesis that the final whoosh lower into the 5 August low was a volatility event caused by position unwinding and not caused by a fundamental crisis. The only thing crashing this week was the VIX, down a spectacular -50pts in nine sessions…
Breadth
Breadth continued to improve this week.
McClellan Summation Index: rising
% stocks above 40dma: rising
Sentiment
After the panic VIX spike to 65 on 5 August and the appearance of anxious trader photos across financial media, sentiment has settled down. The put/call ratio is easing off:
However, this week NAAIM dropped into the 50s, which is contrarian indicator constructive for further QQQ strength:
Seasonality
August and September are not the happiest months for stocks. Seasonality suggests chop or sideways to down consolidation in the short term. This seems a reasonably likely scenario after the recent hard down/hard up moves.
Summary
Price action: QQQ continued to recover rapidly from the 5 Aug low, rising in a steep channel to the 50dma/475 R-zone. It is up +12.5% in nine sessions, so a consolidation phase may be expected short term. Longer term the primary trend remains bullish.
The Fed: continues to tee up a September cut. JPowell speaks on Fri 23 Aug at Jackson Hole.
Breadth: continues to recover.
Sentiment: the put/call ratio eased from the panic high, but the NAAIM survey shows bullish sentiment has taken a hit, which is constructive for QQQ.
Markets: VIX has crashed -50pts in nine sessions.
Key events next week: Fri 23 Aug, JPowell speaks at Jackson Hole
PS, an explainer for the weekly slide can be found here:
https://chartnotes.substack.com/about
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