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A Landmark Day for the US Economy

Exposure Status: Moderate Risk

OVERVIEW
Will It Be Pain Or Profit?

Good morning team, just a heads-up—today is a pretty big deal, more than you might realize at first. Here’s what’s on the economic calendar for today:

- 08:30 AM: May CPI / Core CPI

- 02:00 PM: Fed Rate Decision

- 02:30 PM: Fed Chair Powell’s Press Conference

(All times are in Central Time.)

The release of the CPI data for May, along with Core CPI, is anticipated to stir up some serious volatility in the market. How the market reacts to these figures could lead to significant swings in either direction.

And then, just when we thought things might settle down, we've got the Fed Rate Decision looming over us, scheduled to drop two hours before the market closes. That announcement is likely to stir the pot again, potentially causing another round of big swings in the market.

So, it's definitely going to be a day to keep a close eye on the news and market movements.

Here's what you need to know:

  • Inflation Growth: Economists think inflation grew by 3.4% year-over-year in May, the same as in April. So, prices are 3.4% higher than they were last year, but they're not rising any faster.

  • Monthly Inflation Pace: They also expect that the monthly pace of inflation slowed to 0.1% in May from 0.3% in April. This means prices are still going up, but more slowly than before.

  • Core CPI: This excludes the more volatile energy and food prices and gives a better idea of where inflation is heading long-term. It's expected to slow to 3.5% year-over-year, down from 3.6% in April, suggesting underlying inflation pressures might be easing a bit.

What does this mean?

In simpler terms, if the estimates turn out to be accurate, it means that while prices are still going up, they're not rising as quickly as before. This could be seen as good news for the economy and for stocks.

If this scenario plays out, we might hear Jerome Powell, the chair of the Fed, say that inflation is in line with what the Fed expected. That could lead to a rally in the stock market because investors are really sensitive to any positive or negative comments from Powell.

However, if Powell says anything "hawkish," meaning he's in favor of keeping interest rates high or the same, it could scare investors. In that case, the stock market might experience a sell-off as a result.

Nasdaq

QQQ VRVP Daily Chart

The Nasdaq just keeps climbing, and it's doing so with some serious momentum and trading volume. The index is very strong and there is not much to say with how well it’s finding support on it’s rising daily 10-EMA and seeing almost no selling pressure.

What's driving this latest surge? It’s all pretty much is down to Apple. The tech megagiant, with a market cap of over $3 trillion, had a huge day yesterday, surging +7% intraday, and the volume behind this move was just unbelievable.

AAPL Daily Chart

To give you some perspective: that +7% jump in Apple, paired with a trading volume of 172 million shares, translated to $35 billion traded in Apple stock yesterday alone. And just think about this—within the span of a few hours, Apple's market value increased by over $222 billion.

That's exactly why we always stress the importance of understanding how the Nasdaq is structured. It's capitalisation-weighted, which means that the larger the market cap of an individual stock in the QQQ, the more influence it wields over the index as a whole.

When you've got giants like Apple making such massive moves, they can single-handedly sway the entire index and give you the impression the market is “healthy" when it really isn’t.

S&P Midcap 400

MDY VRVP Daily Chart

The midcaps are where we're really seeing some noticeable market issues crop up. We've been stuck in this descending channel for weeks now, ever since we got rejected for the second time around the $556 mark back in mid-May 2024.

Thankfully, the MDY found some support right at its rising support line at $529, and it's held onto that for the second consecutive day. There's been a significant surge in buying pressure, which has prevented a complete breakdown of the multi-month pennant formation that the midcaps have been shaping up.

But here's the thing: we're still below the point of control (POC) at $535, and all the key daily exponential moving averages (EMA) are still above us. However, considering everything, this isn't actually a terrible spot to be in.

If the Fed can successfully boost everyone's confidence in the equity market, then it's highly probable that the MDY will break above the point of control (POC) and embark on a several-week run. This could potentially lead to a retest of the top of its channel at $556.

Russell 2000

IWM VRVP Daily Chart

It's not surprising that the small caps are looking the weakest right now, because, well, they are. This makes sense when you consider the current monetary policy environment and the inflationary pressures we're facing.

When monetary policy is tight and inflation is a problem, larger players tend to steer clear of the riskier and more speculative stocks, which are predominantly found in the Russell 2000 index. Instead, they go for safer assets like bonds, which tend to perform well in tight monetary conditions and high inflation environments. Alternatively, they might gravitate towards the mega-cap stocks in the QQQ—think Apple, Nvidia, Microsoft, and the like.

Additionally, when borrowing becomes more difficult and interest rates are on the rise, it's the companies with less cash on hand—like those in the small-cap arena—that feel the squeeze the hardest. They're more reliant on borrowing to fuel growth, so higher interest rates hit them particularly hard.

The IWM pretty much needs today to be a dovish day; otherwise, the index is going to just keep tanking and probably retest its daily 200-EMA all the way down at $195. Obviously, the same can be said for the midcaps and also the large caps, but the response just won’t be the same. The smallest, most speculative names are always going to be the hardest hit.

DAILY FOCUS
Waiting & Staying Calm

The absolute worst thing you can do today is stress yourself out. The market is going to do whatever it decides to do, and there's nothing you can do to change that—just take things as they come.

If the economic data is positive and the market reacts positively, then great! We might be able to start adding exposure again and making some money. But if the data is weak and the reaction is poor, it's just going to prolong the time it takes for the market to bounce back—which, by the way, it always does.

Your job today is to stay calm, stay in control of your emotions, and react to whatever the market tells you. We won't be entering any positions unless the CPI data is an absolute blowout. That would be risky because Powell could just throw us a curveball later in the session. So, the only way we'd consider adding naked long exposure is if there's a massively positive reaction, and even then, we'd be cautious and go in with half-sized positions.

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WATCHLIST
The Set-Ups We Like

ALAR: Alarum Technologies Ltd

ALAR Daily Chart

  • The data collection powerhouse, Alarum, is forming a potent volatility contraction pattern (VCP) on its daily 10 and 20 EMAs.

  • Despite being a small cap, this stock has surged over +500% year-to-date and has consistently bounced along its 20-EMA, showing strength with no significant closes below it.

  • ALAR boasts impressive revenue growth and demonstrates a high relative strength compared to the IWM.

  • If we witness a positive reaction to the CPI data, Alarum could be the small cap stock worth considering for buying opportunities.

SMCI: Super Micro Computer, Inc

SMCI Daily Chart

  • SMCI seems ready to go, with its volatility contraction pattern (VCP) having been forming for months now. Considering the performance of NVDA and other related names, we anticipate that SMCI could experience a significant surge in response to a positive CPI reaction today.

  • Given the quality of the stock and the potential for a strong market response, we're considering oversizing our position in SMCI. However, this decision would obviously be assuming a favorable reaction to the CPI data.

This newsletter does not provide financial advice. It is intended solely for educational purposes and does not constitute investment advice or a recommendation to trade assets or make financial decisions. Please exercise caution and conduct your own research.

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