The Fed Might Be Behind the Curve Again

MarketSurge powers the charts in this video.

The long-expected FOMC July meeting came and went. The Fed didn’t cut rates but hinted that it’s getting close to the beginning of a cut cycle. Most stocks sold off heavily after the event. The market believes that the Fed is too conservative and lagging again. It’s the typical Fed – never forward-looking, always too late to act and when it finally decides it’s time, it overreacts. The economy might be close to a recession, yet the Fed stubbornly keeps interest rates high to ensure inflation is defeated. Being too late and then overreacting is exactly the behavior that caused the high inflation post-Covid.

Anyway; we are here to trade and manage risk, not to discuss the Fed. All major indexes are now in a downtrend. They experienced multiple distribution days in the past few weeks. Distribution means institutional selling. Any slight hiccup in tech earnings caused a massive pullback. It’s as if the market is looking for a reason to sell. To top it off, the Japanese Yen has been rallying, causing a reverse carry trade and pressuring US stocks.

Small caps were hit hard too. IWM is sitting at its 50-day moving average and its July CPI gap near 208-209. It’s a make-or-break moment. A weak bounce towards 215 or its declining 20-day moving average is likely to set up a short setup. The premise behind the rally in small caps, biotech, regional banks, and home builders was that the Fed is ready to cut rates. At this point, the market believes that the Fed will cut too late when the economy might be already in a recession – September. Let’s see if buyers start to step up in those sectors next week. The mortgage stocks showed notable relative strength last week, which only makes sense with rates pulling back.

Is the liquidation in tech done or there’s more to come? I don’t know. The correction in the space has already been significant. One of the supposedly new AI- leaders, MU (Micron) went from 160 to 90 in a few weeks. You don’t see such fast drops in a bull market. SOXL (which is a 3x long semis ETF) is down 60% in four weeks. FNGU (which is 3x long tech mega-caps) is down 40%. This doesn’t mean that we should buy blindly the dip. There has to be some sign of seller exhaustion (bullish reversal candles) and a spot we can enter with a relatively tight stop. If the downtrend remains intact, rips to major declining moving averages (10. 20, 50) are likely to be shorting opportunities – we saw it last week in NVDA and QQQ near their 20dEMA and many others. The important levels for QQQ (Nasdaq 100) are 450 (previous resistance that might turn into support), 443 (YTD VWAP), 430 (200dma).

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Rotations Continue

MarketSurge powers the charts in this video.

Since the CPI inflation readings came below estimates on July 11th, we saw a major rotation out of tech and into small caps, financials, biotech, and home builders. The last week was more of the same. The Nasdaq 100, QQQ sliced through its 50dma and tested its 100-day moving average. The S&P 500 barely closed above its 50dma. The small-cap ETF, IWM had another strong week and closed near its 52-week highs. 

The earnings season continues with full force. What I suspected last week about tech earnings was confirmed. The positive surprises are priced in. Any hick-up leads to a quick move down as we saw in TSLA and GOOGL.

The next week is full of market-moving events. AMZN, AAPL, MSFT, META, and AMD report earnings alongside 800+ other stocks. 

There is an FOMC meeting that will shed more light on the Fed’s interest rate policy. The expectation is to hint at a rate cut in September. This is the main reason behind the recent rally in small caps, financials, home builders, and biotech. If the market senses that the Fed wants to keep rates at the same level until the rest of the year, we might see a pullback in those areas. The latter might become a tailwind for tech.

I recently published a few children’s books. Check them out if you have kids or friends who have kids: Investing for babies, Trading for babies, Meditation for babies. You can find my other trading books on Amazon here.

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Tech Stocks Under Distribution

MarketSurge powers the charts in this video.

The new earnings season has just begun and semiconductors have already experienced a significant drop. The 3x long semiconductors ETF, SOXL went from 70 to 48 in a week. ASML gave the tone. They beat estimates but gave soft guidance, which led to a sector-wide selloff. Then TSM came and they beat the estimates, raised guidance and still sold off. 

Netflix reported subscribers well above the estimates and still declined. Such a catalyst used to be good for a 10%+ rally in the recent past. 

I don’t like to generalize about all stocks but so far it seems the good earnings in tech have already been priced in and expected. It will take a truly solid forward guidance to surprise the market. Any minor disappointment and weakness in earnings reports is currently getting punished harshly. This should not shock anyone given how extended the tech sector was just a couple of weeks ago and yet, the quickness in sentiment change has caught many unprepared.

There are quite a few big earnings reports next week that will shed further light on the state of tech – GOOGL, TSLA, TXN, NOW, IBM, etc.

QQQ seems headed for a test of its 50-day moving average around 470. SPY’s 50-day moving average is currently around 540. In the meantime, small caps IWM continue to show relative strength. IWM (small caps) and XBI (biotech) had a strong start to the week but fizzled in the second half. It is already trading below the VWAP since the CPI gap (July 11th), so I am not sure one should be excited about buying dips here either. Homebuilders (XHB, NAIL) and financials (DPST, BNKU) are holding better.

Caution time in the market. One must be more selective and nimble in the current choppier tape. Don’t be stubborn and complacent, believing that anything AI-related will eventually bounce so you don’t need to worry about the current dip. It might happen, it might not. Meanwhile, stops should be honored without questions asked. Keeping drawdowns small during choppy markets is a main requirement for quick compounding and account growth over time.

The silver lining is that correlations haven’t been this low in a long time. It’s a stock pickers market. The domination of the mega-caps in the past year and a half has concentrated everyone’s attention on a tight segment of the market. Most people remain focused on those few names. While no one is watching, there have been other more obscure stocks rising and building bases.

I recently published a few children’s books. Check them out if you have kids or friends who have kids: Investing for babies, Trading for babies, Meditation for babies. You can find my other trading books on Amazon here.

Try my subscription service which includes a private X feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.