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Financial Media Is Lying To You

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OVERVIEW
The Rotation Into Growth Continues

Relative performance sorted by capitalisation weighting

Happy 1st of July, traders!

Let's kick off today's morning report with a much-needed clarification. If you've been tuning into mainstream financial media like the Wall Street Journal or CNBC, you might be feeling pretty shaken by the recent pullback in the Nasdaq. It's being painted as the start of a major correction. And don't even get us started on Friday’s intraday pullback in the major indices—they've blown it way out of proportion, making it seem like a much bigger deal than it probably is.

Now, check out the charts above showing the relative performance over the past week for all the capitalization-weighted groups. You'll notice something interesting: while the mega and large-cap stocks have lagged behind, the smaller, more speculative groups have been significantly outperforming them.

What does this mean?

The most established and safe companies that always have the biggest market caps are the most resilient during periods of uncertainty or when interest rates are high and inflation is stubborn. Yes, technology stocks, in particular, don’t fare the best during these periods when compared to energy stocks or banks. However, regarding large vs. small caps, the bigger the companies are, the smaller and less pronounced their pullbacks tend to be, and the more linear their movements are. This is because a high volume of passive investment from institutions and pension funds tends to flow in and out.

What we have been seeing in the last week and especially on Friday is profit-taking from the biggest and “safest” stocks in the market, with this money starting to rotate into the smaller, more speculative, and more “volatile” stocks in the market. This is happening largely due to the improvements in inflation data which is giving more evidence to the Federal Reserve that it really is time to start cutting interest rates which would signifciantly help the smaller companies who don’t have the wallets to stomach very high borrowing costs for a long time.

We don’t see Friday’s session and the “failure” for the QQQ, MDY, or IWM to close green on the day as some sort of indication that the market is getting ready to gap down. It is possible, as it always is, but we really do not think it is likely.

Nasdaq

QQQ VRVP Daily Chart

The Nasdaq is in a consolidation period as it’s being distributed, with sellers taking profits from the likes of Nvidia and Microsoft. This activity has caused the QQQ to struggle to push above its all-time highs at $487, instead facing rejection at that level. The index is currently holding its daily 10-EMA, with Friday seeing a major intraday sell-off that managed to keep the QQQ just above a significant supply/demand zone at $477.

We don’t believe the QQQ will hold its 10-EMA in the short to medium term. Instead, we expect the Nasdaq to form a volatility contraction pattern (VCP) down to $473, which would require a slight undercut of this 10-EMA. Regardless of whether this happens, some selling in the Nasdaq is positive for the market’s health, which has been incredibly narrow in its breadth for quite some time.

S&P Midcap 400

MDY VRVP Daily Chart

The midcaps actually had a rather constructive day, all things considered. They faced a rejection at the descending level of resistance at $538 and an intraday undercut down to $531, the ascending level of support we’ve marked out above. Despite this, they managed to close the session sandwiched between their daily EMAs and above their point of control (POC), all on very high relative volume with a daily doji candle.

This is not weakness you are seeing in the midcaps, but strength. You’re seeing buyers stepping in to defend key levels, which almost led the MDY to close the day out green. Compare this to the Nasdaq, which had a much more bearish red inverted hammer candle, showing much more aggressive selling with little support from buyers.

We’re still likely to see the MDY trading sideways for a few more sessions as it gets tighter and gears itself up for what we believe will be a breakout to the upside, beginning a strong uptrend heading into summer.

Russell 2000

IWM VRVP Daily Chart

The small caps tapped their head on their POC at $204.60, causing an intraday retracement down to all the rising daily EMAs, which acted as support—something we have been saying for several sessions now needs to happen to show a clear change in character in the IWM. The Russell 2000 managed to close the day out, similar to the MDY, rather positively with a doji candle on high volume above its VCP that it managed to break above on Thursday.

We aren’t out of the woods yet, and it’s still possible we see some sideways action to form a mini VCP just below the POC. However, we do believe this is the beginning of a breakout in the small caps that is going to lead to a productive and bullish July.

DAILY FOCUS
Taking Each Day As It Comes

The market internals continue to rotate and it definatly isn’t the best time to be long big technology stocks that have been leading in the recent months, hwoever, saying that, it also isn’t an optimal time to be aggressively long small or mid caps just yet. The rotation is clearly showing improvements in the specultive groups of the US market but it is more than likely we see a few more sessions of sideways action before everyone starts to agree upon this change in sentiment.

We hold positions in several small/mid cap stocks including ROOT, INSG & SEZL which have been performing rather well and we do see follow through in these companies’ breakouts that does boost our confidence in believing the small and midcaps are about to make some big moves to the upside.

For today, we will stay on the sidelines and not be adding any new open long exposure. We don’t actually see many set-ups that look too promosing and we believe the rotation still very much needs time to actually materialise into a high number of actionable set-ups.

WATCHLIST
The Only One We Really Like For Today

GCT:GigaCloud Technology Inc

GCT Daily Chart

  • GCT continues to hold its multi-month base and even attempted a breakout on Friday, which led us to initiate a long position that ultimately resulted in a 1R loss.

  • We love the stock’s fundamentals, and given the base GCT has managed to build, coupled with its high volatility and strong internals, this is the number one stock we are watching for a breakout.

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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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