Price action
QQQ rose +3.4% in the week on improving tariff headlines, encouraging data releases, and positive earnings from MSFT and META.
On Tuesday, Trump announced an easing of tariffs for the car industry; on Wednesday, he suggested that incoming Canadian PM Carney had expressed eagerness for a deal; then later on Wednesday, a Chinese media source connected to the CCP, Tantien, suggested trade negotiations might start soon.
As for economic data, this week’s releases showed the US economy is holding up better than recent consumer confidence and business sentiment surveys have implied. Although GDP printed negative on Wednesday, prompting a gap down below support c466, the measure was distorted by a surge in net imports ahead of tariff implementation. Significantly, consumer spending showed resilience and business investment showed outright strength. On Thursday, Initial Jobless Claims and Challenger Layoffs came in OK, then the manufacturing ISM was somewhat weak but not a disaster. On Friday, NFPs comfortably beat consensus at 177k versus 130k expected.
Recession fever has been rising since mid-February, so all of this was a relief for QQQ.
QQQ has now rallied +22% from its 7 April low in 18 sessions, a remarkable run that takes it into key resistance at the 200dma (aka the 40wma). Short-term momentum is to the upside, but after a big move into an obvious resistance area, a pullback or consolidation feels likely. It’s hard to tell if a new bullish trend has started or if this move is a bear market rally. Recent price action still looks similar to the early days of the 2022 bear market, which saw a +17% face-ripper into the 40wma that failed.
The Fed
The Fed were in blackout this week ahead of next week’s Fed day. Nick Timiraos of the WSJ (the Fed whisperer) noted that Friday’s decent NFP release takes the pressure off the FOMC to guide for a June cut.
The market is pricing in multiple cuts to the FFR by the end of 2025. However, with jobs remaining strong and uncertainty persisting about the impact of tariffs on prices, the Fed may disappoint those expectations. A hawkish FOMC meeting next week could be the catalyst that brings about a pause or halt to QQQ’s current rally.
Markets & Narratives
The tariff narrative continues to be the dominant driver of QQQ’s price action. Since the 90-day pause to tariff implementation announced on 9 April, the Trump admin has walked back the hardline stance of Liberation Day. We have seen exemptions for the electronics and auto industries; we have heard the administration acknowledge the unsustainability of 145% tariffs on China and this week we heard the overtures of trade negotiations between the two countries; and, the administration have been at pains to assert that America is close to deals with multiple trade partners including India, South Korea, Japan, and the UK.
This softening of the tariff narrative is reflected in measures of policy uncertainty, which are dropping back from extreme levels.
This progress is clearly constructive for QQQ. However, we should acknowledge that uncertainty is still elevated and that the chart above could change abruptly for the worse if Trump switches back into aggressive mode, which is possible. We must also keep in mind that should negotiations falter, investors may start to worry about the 90-day tariff pause, which is already 25 days through its countdown.
Breadth
Breadth continues to be very strong, confirming the rally in the major stock indices. The S&P500’s Advance-Decline Line held up well during April, and has broken to a new high.
Last week we noted that a Zweig Breadth Thrust signal had triggered. This week we narrowly missed a Whaley Breadth Thrust. However, we did see a breadth thrust in high yield bonds, highlighted by SentimenTrader. This signal has a good track record, signalling positive returns three months later in 14 out of 17 instances (the exceptions coming in 2009 and twice in 2022). It’s interesting to see this signal given high yield’s sensitivity to the business cycle and the current widespread pessimism about the US economy.
Sentiment
The AAII and II surveys continue to show extreme bearishness.
Barron’s ran a survey of professional money managers that showed more than 60% of respondents expect a further -20% drop this year, with only 7% of clients bullish. This has solid potential as a contrarian bullish signal.
Equity positioning among hedge funds and CTAs remains light, suggesting the pain trade is higher for that constituency.
The GS US equity sentiment survey also shows positioning is light.
Seasonality
May is not a seasonally strong month for stocks, particularly the first half.
A choppy first half of the month would tie in with a period of consolidation or pullback in QQQ from its current extended state.
Summary
Price action: QQQ extended its rally from the early April low as the Trump admin continued to walk back its hardline tariff stance, and as activity and jobs data provided encouragement that the US economy is not falling apart. QQQ has rallied +22% in 18 sessions into resistance at the 200dma, suggesting a period of consolidation or pullback is likely.
The Fed: the Fed was in blackout ahead of next Wednesday’s FOMC meeting. Nick Timiraos noted that strong jobs data is likely to keep the Fed in wait-and-see mode at its meeting next week.
Markets & Narratives: price action continues to be driven by tariff headlines. The Trump admin continues to de-escalate on trade, which is constructive.
Breadth: a high yield bond breadth thrust triggered this week, which is constructive.
Sentiment: surveys continue to show very bearish sentiment. A Barron’s investor survey showed record levels of bearishness. Positioning is light among hedge funds. This suggests a contrarian bullish signal.
Seasonality: Nasdaq100 seasonality is challenging in May.
Key events next week: Mon - ISM-NM, Tue - AMD earnings, Wed - Fed day, Fri - speeches from FOMC members Willams, Waller, and Barr.
View
Long-term: Neutral. Constructive evidence has emerged over the last two weeks: (1) the Trump admin is walking back hardline trade policy and measures of policy uncertainty are falling. (2) Recent economic data show the jobs market is ok while consumer and business spending is holding up. (3) Breadth is bullish, as evidenced by the recent Zweig Breadth Thrust and high yield bond breadth thrust. (4) Sentiment is pessimistic and investors are positioned lightly, which is contrarian bullish. However, tariff policy remains unpredictable and negative impacts may still be ahead of us, plus there is still technical damage to QQQ’s chart that needs to be repaired. Open-minded about a resumption of bull market conditions, a range market, or a retest of the lows in coming months.
Short-term: QQQ has moved too far, too fast in the last fortnight, pushing into resistance at the 200dma. May is a seasonally weak month. Easy bounce phase likely coming to an end, so I will be looking for a clear reversal to enter a tactical short (won’t fade strong upside momentum). Wednesday is Fed day - could bring an opportunity if JPowell is hawkish.