Price action
QQQ shrugged off last weekend’s news about proposed 30% tariffs on EU and Mexico. The market is giving the benefit of the doubt to Trump and a variety of bullish factors: fiscal stimulus is boosting economies on both sides of the Atlantic, the Treasury has switched to the issuance of Bills over Bonds, which increases liquidity in the system, and the market is starting to price in a dovish pivot from the Fed - either a modest one from JPowell in the form of a couple of cuts later this year, or a substantial one from JPowell’s successor in the form of more aggressive easing and yield curve control.
Short term, things look extended and perhaps a pullback is on the way, but we’ve been thinking that for a while. Most notably, QQQ is now more than 11ATRs above its 100dma. Since 2020, whenever QQQ has extended more than 10ATRs from its 100dma, it’s preceded a period of pullback or consolidation, as shown below in Sep 20, Jul 23, and Jul 24.
The Fed
This week’s major Fed story was about Donald Trump threatening to fire Jerome Powell. A news story to that effect broke via Bloomberg and the NYT on Wednesday, only to be retracted an hour later. Often trial balloons of this sort have a kernel of truth to them, so watch this space. It’s not clear whether Trump has the legal authority to fire Powell without cause. Instead, Trump appears to be piling pressure on Powell to resign. The White House admin has indicated it is investigating renovations to the Fed’s HQ to see if they can find misfeasance or fraud they can pin on Powell. The underlying message being, “unless you resign, we’ll destroy your reputation.” We know from Wednesday’s market reaction to the trial balloon that if Powell is fired or resigns, this could be a catalyst for a pullback.
On Friday the Fed went into blackout before their July meeting. As we have noted in recent posts, there is a split in the FOMC between doves advocating insurance cuts and/or eyeing the next Fed Chair appointment (Waller) and the wait-and-see hawks.
The wait-and-see camp
Hammack (Mon): economy really healthy, Fed hitting goal on jobs but not there yet on inflation, important to stay restrictive on monetary policy, close to neutral, no imminent need to cut rates, if Fed sees economy weaken Fed will respond
Collins (Tue): solid economy gives Fed time to decide next move, challenging to set monetary policy now amid uncertainty, time for Fed to be 'actively patient', tariffs to boost inflation over H2 2025, with core inflation c 3% by years end, tariffs will slow hiring but 'not necessarily by a large amount', strong business and household balance sheets may blunt pain of tariffs, good margins may limit tariff passthrough, tariffs will weigh for a time on what is now a strong economy, but economy currently in a 'good place' overall, core goods inflation showing signs of tariff impact.
Williams (Thu): more data needed before next move, not surprised tariff impacts modest so far, impacts will increase over time, boosting inflation by 1 percentage point in 2025-26, but then easing to 2% in 2027, economy in good place, jobs solid, job growth and labour supply slowing, current policy likely to reduce inflation and moderately weaken jobs market, economy to grow around 1% this year, and UR to 4.5% by year end.
Kugler (Thu): appropriate to keep rates steady for some time, restrictive stance important, CPI broadening across core goods, many reasons to think larger impact of tariffs is yet to come
Daly (Thu): rates have been restrictive for a number of years, June CPI showed some effects of tariffs, impact may be more muted than thought, do not want to lower rates pre-emptively, two cuts this year rbl, rates will be cut consistent with falling inflation, 3% neutral rate
The candidate for next Fed Chair
Waller (Fri): 25bp cut in July justified by risks to the economy, if inflation remains contained and growth tepid, further cuts warranted, Fed should not wait for job market to deteriorate, delaying cuts risks more aggressive moves later, mounting evidence of job market weakness (JOLTS, quits, Beige Book), none show super healthy jobs market, no strong reason to delay, tariffs have one off effect that Fed can look through, July cut would give Fed room to pause in Sep, ex-tariffs inflation is nearing 2%, tariffs likely to increase inflation short term then fade, mkt-based inflation expectations well-anchored, 10% tariff may lift inflation by 0.75-1.0% this year, growth at 1.0% has risk, neutral rate around 3.0%, nobody from Trump admin has approached him re Fed Chair appointment
Breadth
Breadth has been middling.
Sentiment & Positioning
NAAIM ticked down a little, which is constructive. It’s elevated, but not pushing up into 100 as it did a few weeks ago.
The GS US Equity Sentiment Indicator remains stubbornly unbullish, which is consistent with the idea that stocks have a bit more room to run.
Deutsche Bank’s consolidated equity positioning indicator also suggests that folks are not too overweight yet.
There are a few compositional problems with CNN’s Fear & Greed indicator, but it can be useful at extremes. It’s pushing into Extreme Greed territory now, but note it can stay in that zone a while before stocks pull back.
Seasonality
As we move from July to August, the seasonal picture become less favourable. This played out quite distinctly in 2023 and 2024, which both saw Q3 disturbances. Will 2025 make it three on the bounce?
Summary
Price action: QQQ continues to grind higher despite adverse tariff headlines. Realised volatility is very low. QQQ is overbought, as measured by extension from its 100dma.
The Fed: Trump continues to pressure JPowell to resign. Some members of the FOMC favour cutting the FFR in July, but the majority are in favour of the current wait-and-see stance. The Fed is now in blackout ahead of its July meeting.
Markets and Narratives: Trump’s new round of tariff announcements have not made an impact on markets yet.
Breadth: nothing to write home about.
Sentiment and Positioning: investor surveys and sentiment indicators suggest moderately bullish sentiment. On balance, positioning looks neutral to bullish, but not yet extreme.
Seasonality: July is a bullish month for QQQ, but late summer chop is approaching.
Key events next week: Tue - JPowell speaks, earnings from GOOG and TSLA.
View
Short-term: bullish momentum remains strong, but QQQ is overbought as we come into a weak seasonal period in Q3.
Long-term: primary trend bullish.
Technical evidence:
Having spent ten weeks above its 200dma, QQQ has broken to new all time highs.
A Golden Cross signal triggered on 23 June.
Realised volatility is consistent with bull market conditions.
Breadth was very bullish off the lows, evidenced by a sequence of thrust signals with good statistical records (Zweig breadth thrust, HY bond breadth thrust, Degraaf breadth thrust).
Fundamental evidence:
Fiscal stimulus is set to continue absent a bond market revolt. Treasury is switching issuance to Bills from Bonds, which increases system liquidity.
The Fed may cut rates in the coming months.
Trump intends to select a dove as JPowell’s successor.
Trump admin has walked back hardline trade policy.
Recent economic data shows US economy is slowing, but ok.
Supportive themes in tech (AI, defence, nuclear energy, cybersecurity).
Challenges and risks:
If Trump fires JPowell or JPowell resigns unexpectedly, based on Wednesday’s price action, this could cause a pullback.
Tariffs and immigration policy may lead to upside inflation surprises in coming months, though there few signs of this yet.
Weak seasonality in Q3