QQQ weekly: 20-24 May
Price action
QQQ held above the 449.5 breakout level and above its shorter term moving averages, which is constructive. However, price action in the week was choppy, especially around NVDA’s earnings on Thursday, which turned into a bearish distribution day.
Although price action is not yet at an overbought extreme, QQQ has climbed +11% in 25 sessions, so we may get some consolidation, either sideways or down, before too long.
The Fed
The Fed published minutes of its early May meeting on Wednesday. Since that meeting we have had April’s cool CPI reading, which was released on 15 May. So, the FOMC minutes can be considered “stale”. Even so, they created some short term chop on Wednesday afternoon, as they normally do.
Of more interest were comments from Fed speakers during the week. They repeated the message that they need to see more good inflation prints before they will have the confidence to cut. On the dovish side, they continue to push back on the idea of further hikes.
Waller (Tue): several more months of good inflation data needed to support easing monetary policy, further increases in policy probably unnecessary.
Bostic (Tue): not in a hurry to cut.
Barr (Tue): higher for longer.
Bostic (Thu): disinflationary process is going slow.
On Friday, the University of Michigan consumer survey showed that 1yr and 5yr inflation expectations eased a little, which is constructive.
What did we learn about markets?
The NVDA juggernaut keeps on rolling. It is an incredible fundamental story not to be confused with a valuation bubble or a meme mania. Since the start of NVDA’s metoric run, revenue is up 4.4x, gross profit is up to 78%, and EPS is up 22x.
On the subject of NVDA’s valuation, the excellent folks at themarketear.com note the stock’s fwd PE is comfortably below its 3yr median:
So what might kill the price trend? Over the last five quarters the amount by which Nvidia’s forward revenue guidance for the quarter ahead has beaten consensus has fallen steadily. The Apr 23 quarter saw the famous 53% guidance beat that blindsided everyone. This week’s quarter ahead guidance only beat consensus by 4%. Stocks move higher when they beat expectations and bad things happen to the charts of growth stocks when they eventually come to disappoint.
(An excellent study on the behaviour of stellar growth stocks like NVDA and SMCI can be found in William O’Neil’s investing classic, “How to Make Money in Stocks”.)
Breadth
Having been supportive for a while, breadth began to weaken this week. A negative breadth divergence may be developing.
The McClellan Summation Index is rollling over:
A small but visible pick up in Nasdaq New 52wk Lows:
% stocks above 40dma has faded:
Sentiment
The surveys show elevated bullish sentiment. This is not yet extreme, and note the surveys can maintain high bullish readings for some time during bullish phases.
NAAIM: up to 94.5, not far off 100
AAII: Bulls +6pts this week to 47%.
VIX: deep freeze, post-Covid lows, complacency. (A good time to buy some longer dated VIX calls…?)
Summary
QQQ held the post-CPI breakout from the previous week and is holding above its shorter term moving averages. Longer term, the primary trend remains bullish. Shorter term, price action is approaching overbought conditions.
Fed speakers maintained their higher for longer message.
Breadth weakened somewhat this week.
Sentiment is at elevated bullish levels. VIX <12 suggests complacency.
NVDA held up well through its earnings release.
Key events next week: Fed speakers all week, Fri - Core PCE
PS, an explainer for the weekly slide can be found here: