QQQ weekly: 21-25 Oct
A little crack?
Price action
Stock specific news drove price action this week. On Wednesday, NVDA (7.6% of QQQ) pulled back -4% on reports of glitches in the development of its Blackwell chip. Then AAPL (9.0% of QQQ) pulled back -3.5% on reports of an industry survey suggesting lower than expected iPhone production. After the bell on Wednesday the news turned positive as TSLA reported strong earnings. TSLA rose +22% on Thursday, then another +3% on Friday. The weekly net result for QQQ was a bumpy grind higher. Next week is the big earnings week.
Price action on Friday was noteworthy. On Friday morning, QQQ made a strong opening drive, which touched 500 then stalled and dropped out. Conclusion? At the first visit to 500 since July, folks were plainly more interested in taking profits than playing for a breakout. The daily chart printed a reversal candle at the big psychological level on above average volume. Was this an initial crack in the six week grind higher or just another inconsequential wobble?
Note that the ascending wedge patterns in QQQ and SPY have yet to break, either to the upside or the downside. I am keeping an open mind about the direction of an ultimate break as well as the potential for a fakeout up or down before the real move. The patterns clearly look bearish, but remember the longer term primary bullish trend is intact.
The Fed
No change to the messaging from Logan, Kashkari, and Shmid this week - we should expect a gradual cutting cycle.
Next week brings data releases relating to both sides of the Fed’s mandate: on Thursday we get PCE, then on Friday we get NFPs and ISM-M. The Fed is now in blackout ahead of the next FOMC meeting on 6-7 November, so Timiraos et al are back on deck.
What did we learn about markets?
DXY and the 10yr yield are still rising. These tend not to matter until they suddenly do.
Breadth
A modest negative breadth divergence has developed: QQQ and SPY are near their highs, but several breadth indicators are rolling over. This is not constructive.
McClellan Summation Index: falling
% stocks above 40dma: falling
Sentiment
Over the last few weeks sentiment became very bullish, to the point where it has suggested a contrarian bearish signal. Several longer term sentiment indicators look stretched:
Insider Transactions Ratio: bearish
30dma of the equity put/call ratio: this has come down to around 0.54, almost the same low reached before the July 2023 pullback (source, and hat tip to, the peerless Helene Meisler).
Meanwhile, the sentiment surveys we routinely reference have eased off. These tend to capture shorter term sentiment swings than the longer term indicators shown above. They may suggest the mood is changing.
NAAIM: down -3pts to 79, having been up at 90 two weeks ago.
AAII Bulls: down from 46% to 38%.
Seasonality
At the risk of sounding like a broken record, Presidential elections are usually accompanied by volatility and a pullback (see last week’s post for a discussion of price action around the last three US elections). This election cycle the VIX has followed the seasonal pattern - rising as people seek to hedge event risk. But, realised volatility is, as yet, nowhere to be seen.
Summary
Price action: QQQ continues to grind higher, but note 500 acted as clean resistance on Friday. Ascending wedge patterns in QQQ and SPY remain unresolved. The longer term bullish trend remains intact.
The Fed: continues to guide for a gradual pace of cuts.
Markets: DXY and US10y are rising, which may become a headwind.
Breadth: a bearish divergence is developing.
Sentiment: longer term sentiment indicators have reached extreme levels, which warrants caution. Shorter term indicators are retreating from bullish levels.
Seasonality: we are in a challenging period into the Presidential election.
Key events next week: election news, Middle East news; Tue - AMD, GOOGL, V; Wed - MSFT, META; Thu - PCE, AMZN, AAPL, INTC; Fri - NFPs, ISM-M.
View
I remain long-term constructive given the Fed cutting cycle, fiscal stimulus, economic growth, the long-term bull trend, and long-term supportive breadth indicators. But, short-term, I am cautious.
Arguments for short-term caution:
500 resistance held cleanly near the top of an ascending wedge pattern.
A short-term bearish breadth divergence has emerged.
DXY and 10y yield have been rising for five weeks.
Excessively bullish sentiment is showing signs of turning south.
Seasonality and event risk relating to the Presidential election.
PS, an explainer for the weekly slide can be found here.
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