Price action
A combination of overbought price action, euphoric sentiment, and divergent breadth finally brought a pullback in QQQ around the psychological 500 level. The immediate catalyst was a cool CPI print on Thursday. This caused a spike to 505 in premarket trading, which faded. Then, at the open, aggressive selling broke QQQ back down through 500, ultimately dropping it -2.5% to the 21EMA. Friday saw a bounce, but sellers showed up again late in the session in front of 500.
While 500 looks like a solid resistance area, the argument that this pullback might develop into something substantial is undermined by Thursday’s strong rotation into small caps, which is a bullish development that translated into big gains for IWM (+6% in the week), IBB (+6.5%), KRE (+8.7%), and XLU (+4.0%). A further wildcard in the short term is how the market will react to the attempted assassination of Donald Trump on Saturday 13 July.
The Fed
On Tuesday JPowell was at the Senate to talk monetary policy. He continues to project the message that the Fed is shifting from worried-about-inflation to worried-about-jobs.
JPowell (Tue): more good data would strengthen Fed’s confidence on inflation, elevated inflation is not the only risk the Fed faces, labour market has cooled considerably.
The conclusion JPowell wants everyone to draw is that if inflation continues to come down, the Fed will initiate a cutting cycle as a response to a slowing jobs market. Accordingly, the CPI print on Thursday, which constitutes another bit of good data, caused the market-implied probability of a September cut to rise to 88% by the end of the week:
Thinking ahead, perhaps we will see the Fed formally signal a September cut either at the July FOMC, or August’s Jackson Hole meeting.
What did we learn about markets?
We learned that narrow breadth in a strong bull market can resolve with a dramatic rotation out of the leaders and into the laggards. In this instance money flowed out of the Mag7 and into interest rate-sensitive and cyclical sectors, like IWM, IBB and KRE.
Breadth
Breadth was the big story as the rotation unfolded on Thursday.
The Market Monitor, which shows how many stocks went up or down 4% on higher volume than the previous day, showed a bullish thrust with more than 1,000 stocks +4%:
The McClellan Summation Index turned up again:
T2108, aka % stocks above their 40dma, shot up:
Sentiment
The surveys cooled a little this week, but PCR is still stretched.
NAAIM: -10pts
Put call ratio: going even lower…
Citi Panic/Euphoria: well into euphoric territory…
Seasonality
A strong window of Nasdaq 100 seasonality is drawing to a close as we enter the second half of July. Though note we pick up again in August of election years before further headwinds in Sep-Oct.
Meanwhile, VIX seasonality tends to pick up in July as the traditional summer troubles season comes round.
Summary
Price action: QQQ pulled back at 500 after it reached an extreme overbought condition. The catalyst was a cool inflation print that prompted a rotation into small caps. The primary trend in QQQ remains bullish. The assassination attempt on Donald Trump is a short-term wildcard for markets.
The Fed: JPowell continues to project optimism about inflation and concern about soft data, raising expectations of a first cut in September.
Breadth: the negative breadth divergence resolved bullishly with a strong rotation into small caps.
Sentiment: surveys continue to show strong bullish sentiment. The put call ratio and Citi sentiment indicators are at extreme bullish levels.
Seasonality: we are leaving a period of strong seasonality for QQQ and entering a period of strong seasonality for VIX.
Key events next week: US Presidential headlines, Fed speakers, Mon - JPowell
PS, an explainer for the weekly slide can be found here: