AI Is on Fire, But The Fed Is Divided
The S&P was up 1.05% last week, rounding out a record return for the month of April up 9.9% – the best one month return since 2020!
However Friday did print an inverted hammer which may start to suggest a pullback coming. Prices finally rejected the highs of the session after making two intraday attempts higher.
As we know pullbacks are welcome in this market and the main idea has remained to deploy capital on pullbacks that are supported by inter-market dynamics that remain risk on in nature.
Generally any price action that remains over the prior all time high level at 698 is bullish on the higher timeframes. More on this later.
The Fed Gets Less Friendly
Wednesday’s FOMC meeting left the markets with unchanged rates remaining at the 350-375 bps level we’ve been at for the last four months. The Fed Watch tool had priced 100% odds of a pause so no shock there.
As we waved goodbye to Powell, what was a little bit of a shock was the amount of dissents in the Fed statement. It was the first four way dissent since October 1992.
- 8 voted – Hold and keep easing bias
- 3 voted – Hold but remove easing bias (Hammack, Kashkari, Logan)
- 1 voted – Cut now (Super Dove™ Miran)
Remember the three cuts narrative from January? Well thats gone now that some members are becoming more vocal about leaving the possibility of a hike on the table.
The ISM Manufacturing Prices index hit 84.6 in April, which marked the highest read since April 2022, thats up 25.6 points in three months.
Not really a great look for inflation prospects as Powell transitions out of the Fed Chair role to make way for Kevin Warsh who advanced out of the Senate Banking Committee vote the same morning as the FOMC.
Last week we were also conveniently reminded that tariffs can easily become an inflation threat again as Trump raised tariffs on EU cars and trucks from 15% to 25%. We also still have oil risks remaining with Brent settling at 108, after a rejection of Irans latest deal proposal.
Core PCE inflation on Friday came in at 3.2% year over year.
Warsh notably told the Senate Banking Committee that he would not be Trump’s “human sock puppet,” meaning he knows he can’t cut rates into an inflationary environment.
Fed fund futures priced rates as unchanged until December 2027 on that comment, indicating that the market, so far, believes him.
Should the Non-Farm Payroll data come in strong and ISM Services PMI come in hot, it may force the market to test Warsh’s conviction to remain independent far sooner than December 2027.
When the data is released this week, keep an eye on the 10-year yield. If it breaks out over 4.5%, that would be a tell. It would also set the stage for a pullback that’s fairly typical of a new Fed Chair “test.”
AI Passed The Test
The hyper scalers did what they needed to do on earnings.
MSFT, GOOGL, and AMZN all gave the market enough evidence that AI demand is still real. Azure Intelligent Cloud grew 30%, Google Cloud grew 63%, and AWS grew 28%. Mind boggling numbers.
Notice that we left out META.
Thats because the market is not just looking at who’s spending the most on capex, but who is earning from it. Remember that Microsoft, Google, Amazon sell compute. Meta simply consumes compute to optimize their ad targeting and recommendation engines.
It wasn’t a bad quarter for META revenue was still up 33%. Its just that the market is voting with dollars as to how it prefers revenue shows up from capex spend.
For now bulls have the receipts that prove the AI trade is real and durable. Capex is in fact showing up as meaningful revenue increase.
The test continues into next week though with AMD, PLTR, ARM all reporting. As always, we let price light the way, so lets dig into the charts.
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Broad Market Analysis
SPY – Monthly
Bulls produced the best month in both the S&P and Nasdaq since 2020. The S&P closed up 10.51% from March’s close and the Nasdaq 15.69% respectively.
New all time high close, with a higher low in the overall trend count well over the 20 SMA. Generally room to pullback and set a higher low, although I would prefer monthly consolidation sideways and a hold over the prior all time high. Continuation speaks for itself.
SPY – Weekly
Solid green bodied bar with small wicks on either side indicating some mild two sided trade. Trend remains up with plenty of room for a higher low over 698 in an ideal situation, using prior ATH resistance as new support.
Breaking below 698 isn’t the end of the world, but now that we have higher highs, the 20 SMA, fib 38.2, aVWAP stack will start to diverge in a positive sense from the 675 level. Still a structurally important spot, but I wouldn’t love markets going all the way back there.
SPY – Daily
First bearish bar on the daily gives us a clear start to the potential pullback. Breaks below Friday low should kick things off to get back towards the 712.4 area. From there looking for a daily higher low to step up on the retest of the top of the breakout range.
If price fails below that, then theres the potential to stage a right shoulder and offer a stronger daily reversal via head and shoulders (cyan crayon) and get a better looking weekly pullback towards the prior ATH level around 697.85.
Consolidation and continuation should be fairly straight forward to ATHs on look below and fail of Friday lows.
SPY – Hourly
Until proven otherwise, it seems that treating this as a bull flag is the best path forward. Shake the low end and reclaim Friday low sets the move up for higher. Under Friday low with acceptance gets at least the pullback into the 714.65 area.
Under the 712.4 top of the balance range from two weeks ago and we start building out the potential for that right shoulder we just mentioned on the daily chart.
Market Internals – NYSE
Friday’s internals were very neutral which is actually great when we start to quiet down price action wise. It indicates a lack of divergence and healthy digestion of the move higher.
If these were big red reads on Friday’s pullback I would have much more concern about major overshoots. For now, it seems buyers are taking a breather, but not totally being dominated by sellers.
Market Profile
Value clearly shifted higher into the end of the week with the breakout. Note that on Thursday we left behind single prints which align with the top of the range retest for a higher low. Markets could repair that thin structure, and still be totally within the bounds of a healthy pullback.
Good excess high on Friday which indicates the auction ended properly at the highs, and there is no need for repair there.
HYG – Junk Bonds
Junk bonds are one of the data points that goes to bears here. One of the longer run bear divergences we’ve seen in a while. Note the break of the resistance trend line on Friday for the index. Not that I would call it parabolic, but certainly seems like a short term top could have occurred.
$DXY / $TNX – Dollar and Rates
Powell has telegraphed that we’re higher for longer. So this acting as a headwind would make logical sense. The small caps haven’t responded in a bearish manner yet though which is notable. As mentioned earlier, keep an eye on the NFP and Services PMI this week to act as a bearish headwind if strong.
If you want the full take, including all of the nuance of breadth, risk appetite and much, much more, check out the weekend episode here:
Economic & Earnings Calendar
- ISM Services PMI – If prices paid comes in > 71 expect higher rates
- Non Farm Payroll – If > 150k expect higher rates
Top watches: PLTR, ON, BWXT, SHOP, CIFR, DOCN, AMD, LITE, SMCI, ANET, ALAB, HUT, COHR, ARM, APP, FSLY, DDOG, BKSY, IREN, CRWV, AAOI, OPEN, COIN, RKLB, RCAT, WULF
Swing Stock Scans
BKR – Daily Chart
Bull flag at the highs with potential to break into blue sky territory. Over 70 is a daily bull flag break that aligns with a weekly bull flag break over the 66.5 level. Energy services sector, so mind any headlines as it relates to the reopening of the Strait of Hormuz / Iran escalations.
FLY – Daily Chart
Retesting the double bottom neckline and finding buyers so far over the 50 SMA. Looking for breaks of hammer highs to get involved towards the local high around 46 and then monitoring for continuation.
JBHT – Daily Chart
Same setup as the above BKR but in transports.
UAMY – Daily Chart
Breaking out of a base after a long phase of consolidation. Great spot to start trying R:R setups as we breakout close to the level.