QQQ weekly: 1-5 Jul
Price action
QQQ trended higher all week, coinciding with weak ISM-M data on Monday, dovish comments from JPowell on Tuesday, weak ISM-NM data on Wednesday, and then a slight uptick in the unemployment rate in Friday’s NFP report.
The move up from April’s low has developed in a well-defined but steep channel. We are now back into overbought territory. QQQ’s daily RSI is 76, and it is +7ATRs above its 50dma. Note the round number 500 overhead. Will we get a pullback?
The Fed
The main Fed event this week was JPowell’s visit to Sintra in Portugal. He gave remarks on Tuesday that came out just after the opening bell in New York:
JPowell: disinflation trend shows signs of resuming, have made quite a bit of progress, getting back on the disinflationary path, if labour market weakens unexpectedly - that would cause the Fed to act.
QQQ liked those comments. Why? Because it shows the Fed has acknowledged recent soft data and that they are now shifting from worried-about-inflation to worried-about-jobs. Yes, there remain some hawks on the FOMC (most notably Bowman - see last week’s post), but for now we can expect weaker data to elicit a dovish response from the Fed. Conditions are evolving in a manner consistent with the Fed lining up a September cut.
We saw this dynamic in play this week - soft ISMs, JPowell’s comments, and a slight uptick in the unemployment rate (from 4.0% to 4.1%) helped raise the market-implied probability of a first cut in September from 58% last week to 72% on Friday.
What did we learn about markets?
NVDA may have paused, but other QQQ megacaps have taken on the momentum baton. We have seen recent breakouts to new all times highs from GOOGL, AAPL, AMZN, MSFT, and META. Add to that a remarkable bottom bounce from TSLA, +40% since it broke out of a base on 26 June. Momentum is strong. But, like QQQ itself, some of these moves are overbought (TSLA’s daily RSI closed at 85 on Friday).
Breadth
A slight improvement this week, but not much.
McClellan Summation Index: flattening out/turning up?
Nasdaq 100 cumulative Advance-Decline Line: made a new high
% Stocks above their 40dma: still depressed
Sentiment
Sentiment has become very bullish, which is a contrarian bearish indicator.
NAAIM: 103.7. This is a very high reading that has coincided with intermediate swing highs during the current bull market.
Put call ratio 5dma: very low, another contrarian bearish indicator
Seasonality
Last week we pointed out that VIX seasonality picks up mid-July. Of more immediate relevance given the exceptional momentum among the Mag7 is NDX seasonality. It is strong in the first two thirds of July, then weakens into August and September.
Summary
Price action: despite recent signs of topping, QQQ pushed on to new all time highs, helped along by soft data and dovish comments from JPowell. QQQ is overbought, RSI 76, +7ATRs from its 50dma. The primary trend remains bullish.
The Fed: JPowell projected optimism about inflation and concern about soft data, raising expectations of a first cut in September.
Breadth: the negative breadth divergence continues to be problematic.
Sentiment: surveys show extreme bullish sentiment while the options market shows a very low put call ratio. These are increasingly strong contrarian bearish indicators.
Seasonality: seasonality is strong for QQQ in July
Key events next week: Sun/Mon - French election results, US Presidential election headlines; Tue - JPowell; Thu - CPI, 30y auction; Fri - PPI, UniMich
View
Strong seasonality, momentum among the mega-cap index movers, and dovish messaging from the Fed is pushing QQQ into very overbought territory. This in turn is boosting sentiment, which follows price, to extreme euphoric levels. Meanwhile, breadth has remained poor. This set up is suggestive of a short or intermediate term pullback, though it is impossible to know when the current impulsive phase will stall out. I remain bullish, but on high alert for a pullback in QQQ, or a rotation away from tech.
Disclaimer: none of this is intended to be investment advice, these notes are for educational and discussion purposes only, always do your own due diligence.
PS, an explainer for the weekly slide can be found here: