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Another Day, Another AI Rally

Exposure Status: Moderate Risk

OVERVIEW
Employment Data- Expect Volatility

Good morning! We hope you all had a fantastic 4th of July.

So, here's what's going on with the job market data coming out today: In June, we most likely saw job growth slow down a bit, but still remain solid. The unemployment rate should be holding steady at 4%, which would be good news because it means the Federal Reserve might be able to control inflation without pushing us into a recession.

The Labor Department's employment report is coming out in an hour or so, and it's expected to show that annual wage growth is the slowest it's been in three years. Along with the lower prices we saw in May, this suggests that disinflation is back on track after inflation spiked earlier this year.

This should give the Fed more confidence about the inflation outlook and might even bring us closer to seeing a rate cut later this year. Remember that Fed Chair Jerome Powell said this week that the economy is back on a disinflationary path, but he also mentioned that we need more data before making any decisions on rate cuts- this could be that data.

The markets are hopeful that the Fed could start easing up on its policies by September, especially after the aggressive measures they took in 2022 and 2023.

Brian Bethune, an economics professor at Boston College, said that the economy is moving into a sustainable pace of job growth without any sudden downturns. He called it a "soft landing." Last month, nonfarm payrolls likely went up by 190,000 jobs, down from the 272,000 in May, but on average, we've been seeing about 230,000 new jobs per month over the past year.

What does this mean?

This latest data set will either show that our efforts to lower inflation and interest rates are working, putting more pressure on the Fed to cut rates, which would boost the markets. Or, if the report is negative, it could complicate things and potentially confuse the markets.

Nasdaq

QQQ VRVP Daily Chart

Let's talk about the Nasdaq. It just keeps climbing higher and is outperforming nearly everything else in the stock market. After a big breakout earlier this week, it continued its upward trend on Wednesday. The QQQ broke above the significant psychological resistance level of $490, and this happened on surprisingly high volume, especially considering that Wednesday was only a half session.

We can't predict exactly what will happen today since the employment data isn't out yet. However, if the response is positive, we can expect to see more of the same bullish action.

S&P Midcap 400

MDY VRVP Daily Chart

The midcaps have been quite choppy, and Wednesday was disappointing as they continued to trend sideways around their point of control (POC) at $529.

The MDY was rejected at the falling daily 20 and 50 EMAs, which align with a significant supply zone around $536 as shown by the visible range volume profile (VRVP). It's currently stuck between two pretty equal volume clusters.

Today probably won't be very exciting for the MDY, even if the job data is very positive. However, we're hoping to at least see the volatility contraction pattern (VCP) that the MDY has been building for months remain intact.

Russell 2000

IWM VRVP Daily Chart

The IWM is looking pretty similar to the midcaps, with a rejection on Wednesday against the descending resistance level of the Russell 2000's massive multi-month VCP at $203.

One positive note is that the IWM has been continuously setting higher lows. For the past several sessions, we've seen the daily 10-EMA act as support rather than resistance.

Additionally, we've noticed some small-cap stocks we own, like ROOT and INSG, performing well recently. This could be significant since individual stocks often lead, and then the indices we use as proxies for the capitalization group's relative performance tend to lag behind.

DAILY FOCUS
All Depends On Job Data

If we see a strong reaction today to the upcoming employment data, it might spark a rally in certain stocks we're watching. However, we're not overly optimistic about a big rally in small and mid-cap stocks.

The QQQ continues to lead, indicating that large technology stocks are where big money is flowing. And if big money is heading there, that's exactly where we want to be as well. It really isn’t our job to play favourites or to try to outsmart the market’s in any way.

WATCHLIST
Big AI Stocks To Watch

NVDA: NVIDIA Corporation

NVDA Daily Chart

  • It should come as no surprise that Nvidia is looking very strong once again. After its incredible rally following a big earnings-related pivot a few months ago, NVDA is forming another tight volatility contraction pattern (VCP) and even had a breakout on Wednesday, which almost led us to enter a long position.

  • We're watching how the stock behaves today, and if we see a continuation higher, we'll enter a naked long position on a push above $130, assuming there's a strong reaction in the QQQ to the job data.

ARM: Arm Holdings plc

ARM Daily Chart

  • ARM is a recent IPO that's been performing exceptionally well, rallying hard over the last few months with barely any closes below its daily 20-EMA since the start of 2024.

  • The stock is currently forming a textbook volatility contraction pattern (VCP) and looks poised to break higher in the pre-market above its base.

  • We're looking for an entry above $170, assuming a positive reaction to the job data. However, even if the job data isn't favorable, the strength of the Nasdaq and ARM being in a strong industry group make us suspect there's a high likelihood of a breakout with follow-through in the next several sessions.

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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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