The $NVDA Boom: Fed Decision Insights and Market Projections
As summer gently fades into autumn, our family is on the brink of an exciting transition. My daughter Becki is packing her bags to head back to college, while her younger sister Maya is preparing for her very first year. Both are set to embark on their academic adventures at the University of Illinois. It's a delightful twist that both my girls ended up choosing the same school—a surprise we never anticipated but now eagerly embrace.
The prospect of Becki and Maya sharing experiences at the same university brings a mix of nostalgia and excitement. We're looking forward to parents' weekends, where we can relive our own college days through their eyes, and the thrill of football games that promise spirited rivalry and camaraderie. Every holiday and special occasion will now be an opportunity to see them both, an unexpected blessing that adds a layer of joy to our family gatherings.
This unexpected turn of events in our personal lives reminds me of the surprises we've witnessed in the market this week. Just as we never foresaw both daughters attending the same college, the market has thrown several curveballs our way. Earnings reports fell short of expectations, economic data revealed challenges and ongoing speculation about the Federal Reserve's next moves has added uncertainty to the market landscape.
Life, much like the market, is full of surprises—some welcome and others more daunting. As Becki and Maya transition into their next school year, they will face both exciting opportunities and inevitable challenges. Similarly, as investors, we must navigate the good and the bad with equal poise. The key lies in remaining adaptable and clear-headed, turning obstacles into opportunities for growth and learning.
Embracing surprises requires a balanced approach. It’s about managing emotions, maintaining perspective, and focusing on the long term. Just as we support Becki and Maya in their academic pursuits, encouraging them to seize opportunities and learn from setbacks, we must approach the financial markets with a similar mindset. Whether it's re-evaluating portfolios in light of unexpected earnings or adjusting strategies based on new economic data, staying proactive allows us to turn uncertainty into advantage.
As we enter the next stage of the year, with Becki and Maya settling into their academic routines and the stock market gearing up for the next Federal Open Market Committee (FOMC) meeting and the transition from Q3 to Q4, let's embrace both the excitement and the challenges ahead. By staying grounded and adaptable, we can navigate life’s twists and turns with confidence and optimism.
Here’s to embracing the unexpected and finding the silver linings in every surprise, as we look forward to what the future holds for both our families and the markets.
Recent Trade Review
Last week, I executed a bearish put spread on the Invesco QQQ Trust ($QQQ), following its identification by YellowTunnel's Dynamic Power Trader (DPT) services. The DPT model flagged $QQQ as a prime short opportunity, revealing extreme demand for put buying. You can watch the detailed analysis and discussion from last Wednesday's live trading room session here.
This trade exemplifies the power of our proprietary models in identifying lucrative opportunities, even amidst market volatility. The ability to spot such patterns allows us to make informed decisions that align with broader market trends.
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CURRENT TRADING LANDSCAPE
This past week, financial markets experienced significant volatility as investors faced mixed economic signals and corporate earnings reports. On Friday, stocks slid once again after new economic data led traders to question their previous optimism about a "soft landing" for the economy. The July jobs report showed that the U.S. economy added just 114,000 nonfarm payrolls, well below the expected 175,000. This cooling in the labor market, alongside recent updates on U.S. manufacturing, sparked concerns that the Federal Reserve's anticipated rate cuts might not be sufficient to prevent a potential recession. As a result, the SPY rally appears capped at $560-$575, with short-term support at $520-$530. Given these developments, I am transitioning to a market-neutral stance, anticipating sideways trading in the short to medium term while acknowledging that the long-term trend remains intact. For reference, the SPY Seasonal Chart is shown below:
Earlier in the week, stocks fell sharply on Thursday following data that reignited fears about the Fed's ability to navigate the economic slowdown. This decline followed a brief rally on Wednesday, spurred by the Federal Open Market Committee's (FOMC) decision to maintain the federal funds rate, with hints at a possible future reduction. The FOMC opted to keep interest rates steady at 5.25%-5.50%, marking the eighth consecutive meeting without a change. Despite recent signs of slowing inflation and a cooling labor market, Fed Chair Jerome Powell suggested that a rate cut might be considered at the next meeting in September, though no commitments were made.
The FOMC's statement highlighted, "Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated." This reflects a balanced perspective, weighing inflation concerns against labor market changes. The Fed's preferred inflation measure, the personal consumption expenditures (PCE) price index, showed a 2.5% annual increase as of June, with core PCE inflation at 2.6%. Meanwhile, the unemployment rate ticked up to 4.3%, indicating potential shifts in labor market dynamics.
In the corporate sector, the tech industry was a focal point as major companies released their quarterly earnings. Meta Platforms reported a significant revenue increase of 22% and a 73% rise in earnings for the June quarter, bucking the trend of fluctuating tech stock performances. Apple exceeded Wall Street estimates across the board, while Amazon and Apple reported modest gains, maintaining a cautious outlook due to broader economic uncertainties. Microsoft, despite strong earnings, saw a dip in its shares as investors scrutinized its substantial investments in AI technology. Advanced Micro Devices (AMD) led a rally in chip stocks after raising its full-year AI GPU revenue expectations. However, Nvidia faced a decline as investors awaited its earnings report later this month, highlighting the sector's sensitivity to earnings outcomes and AI demand.
Not all earnings reports were positive. Moderna fell 21% after cutting its full-year revenue guidance by as much as 25%, citing "very low" COVID-19 vaccine sales in Europe and tight competition in the U.S. Qualcomm’s fiscal third-quarter adjusted earnings of $2.33 a share beat consensus estimates, while revenue of $9.4 billion topped expectations of $9.2 billion. Despite issuing a solid revenue forecast for the fourth quarter, shares fell 9.4%. Arm Holdings reported fiscal first-quarter adjusted earnings of 40 cents a share, beating forecasts of 34 cents. Revenue jumped 39% to $939 million, exceeding expectations of $905.5 million. However, the stock fell 16% after Arm’s royalty revenue fell short of estimates and it issued tepid guidance for the fiscal second quarter.
Economic indicators painted a mixed picture, with the U.S. manufacturing sector continuing to show signs of weakness. The Institute for Supply Management's Purchasing Managers Index (PMI) dropped to 46.8 in July from June's 48.5, marking the fourth consecutive month of contraction. This figure fell short of expectations, signaling persistent challenges in manufacturing growth and casting a shadow over economic recovery prospects. The PMI's new orders index, which gauges future demand, also declined, indicating ongoing difficulties in the sector.
The Bureau of Labor Statistics' July jobs report further shocked the markets, with payroll increases of just 114,000 versus the expected 175,000. Revisions also showed lower gains for previous months, with June's increase revised down to 179,000 from 206,000, and May's to 216,000 from 218,000. Wage growth moderated in July, with Americans’ average hourly earnings rising by 0.2% during the month, a tenth of a point less than expected, marking the smallest annual gain since 2021.
Fear gripped the market this week as recent data challenged the rosy view of a resilient economy. The CBOE Volatility Index (VIX) rose to 28.18, a 70% spike this week, signaling heightened market volatility. The VIX last traded above 20 on October 27, 2023. A reading over 20 indicates high volatility, while a reading over 30 suggests extreme volatility.
Geopolitical tensions added to the market's volatility, with crude oil futures recording their largest one-day gain since October. This was driven by concerns over potential conflict between Israel and Iran following the killings of a Hezbollah military leader in Beirut and a top Hamas political leader in Tehran. However, these gains were tempered by concerns about weak demand from China, which continues to weigh on the market. European stocks fell further in afternoon trade after the U.S. Labor Department's monthly jobs report showed hiring slowed in July, while the unemployment rate ticked up.
The bond market displayed significant volatility, with the 10-year U.S. Treasury yield fluctuating between 4.2% and 4.7%. Notably, the 2-year yield fell below the 30-year yield for the first time in two years, suggesting shifting economic expectations and potential future monetary policy adjustments. This yield inversion, often seen as a precursor to recession, added to the market's uncertainty. Bond prices rallied again, with the yield on the 2-year Treasury note dropping to 3.98% and the 10-year yield down to 3.871%.
Looking ahead to next week, key earnings reports are expected from companies like Eli Lilly (LLY), Disney, Caterpillar (CAT), and Uber. Important economic reports to watch include ISM Services, Services PMI, Consumer Credit, and the U.S. Trade Deficit. Given recent developments, I am adopting a market-neutral stance as the market seems to have reached its peak. While inflation is aligning with expectations and earnings season has been better than expected, risks persist as the economy cools, unemployment rises, and small banks face potential failures due to exposure to commercial and residential real estate.
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SECTOR SPOTLIGHT
As we navigate through a turbulent market environment, focusing on sectors that may offer strategic advantages becomes crucial. With recent economic data pointing towards potential weaknesses and heightened market volatility, investors might want to explore opportunities within the inverse ETF sector. These ETFs are designed to benefit from declines in major indices, offering a hedge against bearish trends.
One ETF to consider in this context is the ProShares Short QQQ (PSQ). This fund aims to deliver returns that are the inverse of the daily performance of the Nasdaq-100 Index. Given the current market conditions, including the recent cooling in job growth and weaker-than-expected manufacturing data, PSQ provides an intriguing option. The Nasdaq-100, with its heavy weighting in technology stocks, has been particularly susceptible to market shifts, making an inverse ETF like PSQ a potential hedge against further declines in this sector.
Trade of the Week: ProShares Short QQQ (PSQ)
The ProShares Short QQQ (PSQ) is designed to provide investors with an inverse exposure to the Nasdaq-100 Index. This ETF is specifically structured to perform in the opposite direction of the Nasdaq-100 on a daily basis. For example, if the Nasdaq-100 falls by 1%, PSQ aims to rise by 1%, providing a way to profit from declines in the index.
In light of recent market developments outlined in the Current Trading Landscape, PSQ stands out as a strong candidate for the week ahead. The market has experienced heightened volatility, with stocks falling sharply on Thursday due to fears that the Federal Reserve’s anticipated rate cut might not be sufficient to stave off a recession. The SPY rally has also shown signs of being capped at $560-$575, with short-term support around $520-$530. This sets a backdrop of uncertainty and potential further declines.
The recent job report highlighted a slowdown in job creation, with only 114,000 nonfarm payrolls added in July compared to the expected 175,000. Additionally, the manufacturing sector has shown continued weakness, as evidenced by the PMI dropping to 46.8, indicating persistent contraction. These factors contribute to a bearish outlook for the tech-heavy Nasdaq-100, where PSQ is likely to benefit.
My A.I. models have identified PSQ as a favorable position given the current economic indicators and market volatility. The models suggest that the tech sector, which heavily influences the Nasdaq-100, may face additional challenges ahead. This aligns with the broader market trend of increasing volatility, as reflected in the CBOE Volatility Index (VIX), which spiked to 28.18 this week, signaling heightened fear and uncertainty.
Given these conditions, PSQ offers a strategic opportunity to hedge against potential declines in the Nasdaq-100 and capitalize on the bearish sentiment currently prevalent in the market. As we move into the next phase of the year, with economic uncertainties and potential adjustments in monetary policy, PSQ provides a tactical way to navigate these challenges and potentially benefit from further market downturns.
This week, I’ll be adding ProShares Short QQQ ETF (PSQ) to my portfolio!
And one more thing! Our track record speaks for itself from the standpoint of a Winning Trades Percentage, Average Return Per Trade, and Net Gain. Just take a look:
The consistent performance of our services is just incredible. My historical stellar performance is made possible by being right on 84.23% of all trades that I made, with an average profit of 37.13% per trade on our collective trade recommendations. To my knowledge, this trading performance is one-of-a-kind and stands alone in the marketplace for superior trading advice where our numbers and results speak for themselves.
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One more thing, I've had the opportunity to take additional action with a great organization supporting families in Ukraine directly. Gate.org is a foundation where fundraising is held for specific families, allocating funds to multiple families currently living in Ukraine. I am on the board of directors for this great initiative and encourage everyone to check it out and donate if possible. The war in Ukraine is escalating and families are being negatively impacted and displaced daily. To learn more about this initiative to help families, please see the link below:
Wishing you a week filled with resilience, growth, and prosperous opportunities!