Price action
QQQ reached an extreme overbought condition on Monday. The daily RSI hit 82, with QQQ extending approximately +7ATRs above its 50dma. Thursday saw a double top and perhaps the beginning of a short or intermediate term pullback. Monday’s high may help identify the upper bound of a rising channel, which began from April’s lows.
QQQ price extension from 50dma:
RSI hit 82, the highest level since the pandemic:
The Fed
Fed speakers were back on the circuit. Last week we noted greenshoots of optimism from Goolsbee and Mester. This week was a mixed bag. Higher for longer remains the base case.
Dovish
Goolsbee (Tue): May CPI excellent, optimistic on the long view
Barkin (Tue): CPI very encouraging, closely watching lay off rate
Kugler (Tue): likely appropriate to begin easing this year, data dependent
Undecidedish
Harker (Mon): one cut appropriate this year, but could be one or none, last CPI welcome
Williams (Tue): data dependent
Hawkish
Musalem (Tue): need to see further favourable inflation data, could take months or quarters
Collins (Tue): Fed should remain patient, recent data encouraging but too soon to say inflation is retreating to 2%
Logan (Tue): inflation still too high, CPI welcome, but more of the same needed
Kashkari (Thu): will take a year or two to get to 2% inflation, data dependent
The next significant release will be Core PCE on Fri 28 Jun.
What did we learn about markets?
NVDA has been a major driving force behind QQQ’s trend higher. It took a pause on Thursday, pulling back -7% from intraday high to low. If NVDA pulls back or consolidates then it may be hard for QQQ to push on, absent broadening participation among the rest of its constituents. Note how the reversal candle coincides with breathless accolades across financial media - file under, “things you see at tops not bottoms”.
Breadth
The negative breadth divergence continues to worsen. Should the market leaders roll over and take the market with it, this could potentially lead to an oversold breadth set up, which would be bullish.
McClellan Summation Index: still falling
Nasdaq advance-decline line: not confirming new highs in the index
% stocks above 40dma (aka T2108): still weak. The chart below shows a hypotheticl/ideal oversold breadth set up leading to a rally continuation. Fingers crossed…
Sentiment
The surveys showed no change in sentiment, which remains at bullish levels. The put call ratio suggests complacency.
NAAIM: -1pt
AAII: Bears -3pts
Put call ratio: very low
Summary
QQQ paused at very overbought levels. It may be beginning a corrective phase. The long term primary trend remains bullish.
Fed speakers offered a mix of views. Some contemplated initiating a cutting cycle this year, others called for more patience. Higher for longer remains base case.
Breadth continues to be problematic.
Sentiment is bullish. The put call ratio is low, which is a contrarian bearish indicator.
Key events next week: Fed speakers all week; Fri - PCE.
PS, an explainer for the weekly slide can be found here: