Price action
The pullback that began with QQQ’s failed break of 500 continued this week, with QQQ almost reaching its 100dma. At worst, QQQ was -9.5% off the recent all time high, a decent pullback. We closed the week just above a confluence of support around 450 (March highs, 100dma, 61.8 Fib of the Apr-Jul leg).
By Thursday, QQQ was very extended from its short term moving averages (-2.7ATRs from its 10dma, -3.1ATRs from its 20dma). The chart below shows how similarly oversold conditions have preceded a period of respite during this bull market.
The Fed
The Fed were in blackout this week ahead of next week’s FOMC meeting, but Bill Dudley was not. The former FOMC member and President of the Reserve Bank of New York wrote an opinion piece in Bloomberg that turned heads.
Dudley’s main points:
Fed should cut next week, not wait till Sep.
Jobs: the 3-month average unemployment rate has risen +0.43% from its 12-month low, almost at the 0.5% increase identified by the Sahm Rule, which “has invariably signaled a US recession”.
Inflation: falling, Core PCE in May was 2.6% yy, almost at the Fed’s 2.0% target.
Nick Timiraos of the WSJ helpfully highlighted the swiftness of Dudley’s about-turn:
Might the Fed cut next week? The market-implied probability of a July cut is only 6%. The Fed doesn’t like to surprise the market, so a cut seems unlikely. However, JPowell may lay the groundwork for September. (Note, with dovish expectations running high, a disappointment would cause problems.)
What did we learn about markets?
The rotation continues. Money has been flowing out of the Mag7 and into value sectors and small caps. This week, QQQ dropped -2.6%, but IWM rose +3.8%. The divergence since 11 July has been startling. Due a rest soon?
Breadth
QQQ’s pullback has been driven by weakness among the big index movers. This sets up something of a positive divergence between the index price action and overall market breadth, which has been improving.
This could resolve either with QQQ turning back up, or QQQ’s weak action spreading across the market. A number of the Mag7 and semiconductors report this week, which may decide the outcome. Tuesday: AMD, MSFT; Wednesday: META, ARM, QCOM, LRCX; Thursday: AMZN, AAPL, INTC.
McClellan Summation Index: moving higher
% stocks above 40dma: moving higher
Sentiment
The uptick in VIX was reflected in this week’s sentiment surveys, which showed a marked cooling from recent highs. The surveys have been working well in helping anticipate local tops in QQQ and SPY.
NAAIM: -10pts this week, falling back from the recent very hot 100+ reading.
AAII bulls: -10pts from a very hot 53% to 43%.
VIX: not falling back yet
Summary
Price action: QQQ continued to pull back after its failed breakout of 500. QQQ is short term extended to the downside, which may precede a short term bounce. The primary trend remains bullish.
The Fed: Wednesday 31 July is Fed day. JPowell may provide guidance about a long-awaited cutting cycle.
Breadth: the strong divergence between QQQ and small caps continues, setting up a positive breadth divergence between QQQ and the broader market.
Sentiment: easing back from extreme bullish readings, which is constructive.
Key events next week: US Presidential election headlines; Tue - earnings (MSFT, AMD); Wed - FOMC interest rate decision, earnings (META, ARM, QCOM, INTC); Thu - ISM-M, earnings (AMZN, AAPL, INTC, COIN); Fri - NFPs.
PS, an explainer for the weekly slide can be found here:
https://chartnotes.substack.com/about
PPS, if you find these posts useful, please do share - thank you!