OVERVIEW
Small Caps Booming

Yesterday's CPI data revealed a decline in headline inflation for the past month, with a yearly increase of about 3%, strengthening the belief that the Federal Reserve might start cutting interest rates as soon as September. In his Congressional testimony this week, Fed Chair Jerome Powell acknowledged the potential economic harm of maintaining high rates for too long. Following this news, the Nasdaq and S&P 500 took a hit, mainly due to the drop in big tech and airline stocks as investors began rotating into smaller-cap stocks.

The Nasdaq fell by 2% and the S&P 500 by 0.9%, breaking their seven-day winning streak of hitting record highs. On the flip side, the Dow Jones managed a tiny gain of 0.1%, and the Russell 2000, which tracks smaller companies, jumped a solid 3.7%.

The recent rally has been driven by tech stocks and hopes that the Fed would cut its key interest rate as early as September. But on Thursday, tech stocks dragged the indexes down. Nvidia dropped 5.6%, and Meta, Apple, and Intel also saw losses. Tesla had been on an 11-day winning streak but then plunged 8.4% because of a report saying they’re delaying their robotaxi event.

Airlines took a big hit too, especially after Delta's earnings report disappointed and they lowered their outlook. United and American Airlines also saw their shares fall.

Earlier in the day, the major indexes had been up because a government report showed consumer prices fell in June, which added to the speculation that the Fed will cut rates soon. The Fed's waiting for more signs that inflation is under control, and this report could be a part of that.

Fed Chair Jerome Powell spoke at a Senate hearing this week, and traders are now betting there’s a 93% chance the Fed will cut rates in September, up from 73% just the day before.

While tech stocks were down, other sectors like homebuilders and real estate saw gains thanks to the rate-cut optimism. Companies like D.R. Horton, PulteGroup, Lennar, and Alexandria Real Estate Equities did well.

Ed Yardeni commented that it looks like a rate cut is really coming soon. Sam Stovall from CFRA Research said investors are shifting from large-cap tech to mid- and small-cap stocks, as well as real estate, since they were waiting for confirmation that the Fed is likely to start cutting rates without it being a reaction to a recession.

Nasdaq

Following yesterday's CPI data release, the QQQ, which is heavily dominated by large tech stocks, experienced a significant decline. This drop reflects investor concerns about the shifting economic landscape and the potential impact on tech companies. The ETF consolidated at its daily 10 EMA, closing the day at $491.93 amidst high selling volume. The increased selling activity indicates a broader market apprehension as investors reallocate their portfolios in anticipation of the Federal Reserve's potential interest rate cuts.

This market movement underscores a broader trend where investors are rotating out of large-cap tech stocks and into smaller-cap and other sectors expected to benefit from lower interest rates. The QQQ's struggle to maintain its position above the 10 EMA highlights the vulnerability of tech stocks in the current economic climate. As the market adjusts to the new inflation data and Fed Chair Jerome Powell's recent comments, it's clear that investor sentiment is shifting, and the tech-heavy QQQ is bearing the brunt of this transition.

S&P Midcap 400

The MDY broke out of its volatility contraction pattern, closing the day at $546.79. This breakout was accompanied by large buying volume, indicating strong investor interest and confidence. The ETF is trending well above all of its daily EMAs, suggesting a robust upward momentum. This performance highlights a significant shift in investor sentiment towards small and mid-cap stocks.

The rotation into small and mid-caps can be attributed to the expectation that these sectors will benefit more from the anticipated interest rate cuts by the Federal Reserve. With the inflation data reinforcing the belief that rate cuts could begin as soon as September, investors are reallocating their portfolios accordingly. The MDY's strong performance reflects this strategic shift, as market participants seek opportunities in sectors poised for growth in a lower interest rate environment.

Russell 2000

The IWM also experienced a strong breakout, closing at an impressive $210.68. The breakout was accompanied by heavy buying volume, indicating robust investor interest. The ETF is trending well above all of its daily EMAs, suggesting strong upward momentum and the potential for the beginning of a significant rally.

This performance reflects the broader market shift towards small-cap stocks, driven by expectations of potential interest rate cuts by the Federal Reserve. The CPI data reinforced the belief that rate cuts could start as soon as September, prompting investors to reallocate their portfolios into sectors poised for growth in a lower interest rate environment.

DAILY FOCUS
Be On The Lookout

The small and mid-caps reacted positively to the recent CPI data, so we will be looking to take exposure in any valid setups we see in these sectors. The strong performance of ETFs like MDY and IWM, which both saw significant breakouts with high buying volumes, reinforces our confidence in this strategy. These sectors are trending well above their daily EMAs, indicating strong upward momentum and potential for further gains.

Given the sell-off in tech stocks yesterday, we are avoiding long positions in that area for now. The heavy selling in tech stocks, reflected in the sharp declines in the QQQ, suggests that investors are reallocating their portfolios away from large-cap tech in anticipation of potential interest rate cuts. This rotation makes small and mid-caps more attractive as they are expected to benefit more from a lower interest rate environment.

We will also be closely watching to see if there’s any market reaction to the PPI data, which will be released today one hour before the market opens. The PPI data could provide additional insights into inflation trends and further influence the Federal Reserve's monetary policy decisions. Any significant reaction to this data could present new opportunities or risks, so we will remain vigilant and adjust our strategy accordingly.

WATCHLIST
One To Watch

OCUL: Ocular Therapeutix Inc

• Ocular Therapeutix is a biopharmaceutical company focused on developing and commercializing innovative therapies for diseases and conditions affecting the eye.

• OCUL broke out of its volatility contraction pattern yesterday, signaling potential upward momentum and increased trading activity.

• The stock is currently trending above its daily 10 EMA, indicating bullish sentiment and suggesting that buyers are in control

• OCUL is worth monitoring closely as it has shown signs of upward momentum following its breakout, particularly if investor interest in small-cap stocks continues to strengthen

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