Price action
QQQ began the week in a tight, wait-and-see range ahead of the Fed. At 2pm on Wednesday the first reaction to the 50bps cut was a spike higher. But, instead of holding the range break, price action descended into erratic chop, hunting out stops above and below the high and low of the prior day. However, after hours, QQQ regained its orderliness and trended higher, producing a big +2.4% gap at Thursday’s open. QQQ closed the week above support and through the descending trendline resistance from the July high, which is constructive.
Elsewhere, SPY and DIA also finished the week above resistance, at all time highs. Longer term bullish trend channels are intact across QQQ, SPY, and DIA.
The Fed
As we noted last week, the Fed’s back-channel messaging signalled that a 50bps, not 25bps, cut was on the way.
What should we take away from the press conference? It’s useful to listen closely to JPowell and identify the points he emphasises most. To this listener, there was one key message, which follows on from his Jackson Hole speech in August. Nick Timiraos of the WSJ asked JP a complicated and jargon-filled question insinuating that a 50bps cut implied the Fed had waited too long to ease policy. JP tersely gave a clear response:
“Take this decision as a sign of our commitment not to get behind the curve.”
Conclusion? US economic strength is now objective number one, so don’t be surprised when the Fed errs on the side of dovishness from here.
What did we learn about markets?
On Friday before the market open, there was news that MSFT had entered into a power purchase agreement with Constellation Energy for the provision of electricity which will be generated at the Three Mile Island nuclear power plant.
This prompted a huge move in CEG on massive volume:
Many other names related to the nuclear energy theme also rallied, including CCJ, URA, OKLO, SMR, MIR. This is signficant becasue it is the sort of price action that occurs in strong bullish phases. Howard Marks observed that in bull markets people care about stories, but in bear markets they care about balance sheets. As long as seasonality and the election don’t pull the rug, then look out for speculative sectors like cryptocurrency, renewable energy, EVs, biotech etc.
Breadth
There has been a broadening of the rally as the SP490 catches up wih the top ten monstercaps. These charts come from the excellent themarketear.com:
Sentiment
Anything to get worried about here? AAII bulls have jammed straight back to 50+, which has been a problematic level during this bull market.
But, the NAAIM is still short of the 100 zone, which has brought us pullbacks since the rally began in late 2022. Perhaps one last push higher in QQQ to 500 will get sentiment to a bullish extreme?
Seasonality
Seasonality is a problem, especially in election years. Here’s a chart showing the average move in the VIX in the run up to Presidential elections (source, thedailyshot.com/MUFG).
Summary
Price action: QQQ broke above resistance after the Fed cut 50bps, then held the move. SPY and DIA have broken to all time highs. The primary bullish channel in QQQ remains intact.
The Fed: cut 50bps and signalled a determination to support the labour market and the economy.
Breadth: improving - the bull market shows signs of broadening. Story stocks are working.
Sentiment: rapidly rising bullishness in the surveys, but not yet to a clear extreme that signals a pullback.
Seasonality: headwinds from here to the election on Tue 5 Nov, especially the second half of Sep.
Key events next week: JP back on deck, plus PCE Friday.
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It sounds like the markets are in an interesting spot right now, with the Fed’s 50bps cut and the rally in QQQ, SPY, and DIA breaking through resistance levels. The fact that sentiment is bullish but not at extreme levels is intriguing—there might still be some room for gains before a pullback, especially with speculative sectors like nuclear energy and renewables catching a strong bid.
That said, seasonality and election-related volatility could add some bumps in the road. What’s your take—do you think QQQ pushes to 500 before we see a pullback, or will the election year jitters kick in sooner?