The AI Bill Comes Due – The Markets Catch 22
The S&P closed down 2.38% from the prior weekly close after suffering a gap down on Tuesday and being unable to rally back through the loss.
The trend has flipped to down via the lower high and lower low that was brought in under 739.65. Price failed on Monday to breakout and sustain over the June 18th inside bar, and Tuesday’s gap down on the Korean market blowup was the final blow.
With the trend no longer up, the loss of the 20 and 50 day moving averages, it makes sense to adjust expectations moving forward from here. Think less linear uptrend and more two sided trade to come.
The AI Bill Comes Due
Micron earnings could not have been more picture perfect.
They crushed the revenue, margin, and EPS. Data center revenue was up over $100B at an annualized pace. They signed sixteen strategic customer agreements and have vision into tight memory supply through 2027.
This is great news for Micron, and proves that the cycle may be more durable than previously thought.
However, its not so great for everyone else.
Memory used to be a cyclical input cost that was largely ignored. Now, pricing is so steep, it can’t be ignored.
Makes sense that Apple and Microsoft came out last week both announcing price hikes due to higher input costs… *cough, cough, memory.*
Apple is off of recent highs by more that 10% and Microsoft even worse, 25%.
But it won’t just stop at consumer devices, the market has punished all of the hyperscalers who have no choice but to buy more expensive memory chips.
At what point do investors say, the the margin compression on the hyperscalers isn’t worth it and it just makes more sense to own the bottleneck? At what point does AI-flation bleed over into consumer inflation?
While I don’t have the exact fundamental answer for those questions, its clear to see from a technical perspective that the hyperscalers have underperformed the broader Nasdaq as of now measuring from the April 8th gap up start.
This likely means that the place to focus remains the memory complex for the foreseeable future. MU, SNDK, WDC, STC are the names to have on watch for new consolidations or weekly higher low pullbacks. Hyperscalers (and Mag7) stocks are in short term downtrends that will require time to build bases from.
No Easy Out For The Fed
The PCE report on Thursday hardly gave the Fed any cover.
Headline PCE accelerated to a 4.1% year over year and core came in at 3.4% year over year. Numbers too hot for a Fed chair who in his very last meeting reiterated that “inflation is a choice.”
We do know that Warsh has initiated a few task forces that are willing to re-evaluate inflation, and the datasources that the Fed uses to asscess a more real time number rather than an “echo of history.”
Above we see Truflation reading at 1.9% against a CPI report of 4.2%.
With fresh Iran / Hormuz escalation over the weekend, we may think another shock is coming from energy markets, however crude has largely continued in the downward direction even after other breaches of the “ceasefire” agreement.
Prices are still moving lower and even traded below $70/barrel last week. There’s plenty of room for a lower high from a trend perspective even if the weekend strikes do cause a short term rally.
Instead the next domino comes from labor.
The Thursday labor report will tell us what the market is worried about. The payroll number is what we want to see as the judge for where the market stands on the dual mandate front.
A soft payroll number with normal wage growth might be manageable, but a firmer payroll number with sticky wage growth puts the pressure on Warsh to keep rates higher. Back to two hikes we go?
Recall that June 5th was the first change in character for the market when the hotter than expected labor report came in and rates spiked.
Thats the setup headed into Thursday. Friday markets are closed for the long weekend. As always, we’ll have the fundamental backdrop knowledge, but let the charts light the way.
Let’s jump in.
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Broad Market Analysis
SPY – Weekly
Bears take the bar to bar analysis with bearish red body close and lower high/lower low combinations. However this still strikes me as a pullback from the all time high and a digestion of the massive rally off of the March low. Price is still above the fib 38.2, the 712.4 higher low and the line in the sand at 700 (pATH retest).
If you look at the SPX or /ES futures, there is no lower wick that punctures the low from two weeks ago. This is partly due to the mechanic of the S&P rebalance and end of quarter MoC orders. Not worth overanalyzing the divergence, lets just see where we open Monday.
SPY – Daily
The daily trend is officially down after the lower high and failure on Monday to preserve a higher low. The three most important levels as it relates to trend this week are going to be 743.5, 732, 725.
If price closes the overhead gap, accepts higher and offers a Brigade Bolt™ over 743.5, I will change my tone from being cautiously bearish to neutral, heck even bullish after sellers fail to materialize on the downside pressure.
A lower high set under 743.5 on the gap fill reversal should then repressure the prior weekly low at 732. If that breaks, look for the full rotation into the swing low at 725. Below 725 and the bears should really run away with it into 712.4.
The only situation that saves the market at 725 is a look below and fail that would set us up for a more neutral summer chop. Markets likely need more sideways if thats the case.
SPY – Hourly
Similar pathing to the daily, just want to illustrate the weight of the anchored VWAPs sitting right at the gap close area. Lots of references that make the 743.5 area a reasonable spot for shorts to attack the daily lower high.
Market Internals – NYSE
Internals really were neutral rather than bearish through the week. Not many extreme reads on either side of the zeros. All things considered, this would actually skew bullish noting the divergence with the market moving lower. Bears didn’t do a great job of actually moving the needle.
Market Profile – /ES
Two main takeaways here are: 1) The lack of value actually shifting lower on the Friday session, meaning bears aren’t getting acceptance on the lows. 2) Poor high on Wednesday means the auction didn’t end properly and should break that level if retested. Should markets tag up to 7500, we’ll likely at least see the gap close above.
S&P Sector Fan – 1H/5D Chart
Its clear markets are experiencing a rotation out of technology stocks and into healthcare. The Tuesday gap down was the first indication with Thursday’s huge rally in healthcare sealing the deal. This indicates risk off, but money not completely leaving the market. Rotation keeps a market sideways not aggressively down.
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
Thursday’s main event is the Non Farm Payroll data.
- Hot report & hot wage growth –> Fed pause / hike –> Bearish for QQQ
- Cool report & cool wage growth –> Fed pause / cut –> Bullish for QQQ
Top watches: AVAV, NKE
Swing Stock Scans
ALAB – Daily Chart
Retesting the breakout point and the daily 20 SMA. Look below and fail under Friday’s low or break over Friday’s high could be the entry to get back towards highs and or higher.
AMKR – Daily Chart
Retesting the breakout point and the daily 20 SMA. Same as ALAB, a look below and fail under Friday’s low or break over Friday’s high could be the entry to get back towards highs and or higher.
ATI – Daily Chart
Second flag forming after a break of the larger base and first flag near 180. Needs to hold the daily 20 SMA if its going to remain in play for a perfect flag. Remember that the first flag is strongest, and the legs get harder to catch the further into the trend we get.
CGNX – Daily Chart
Trying to build out a new base as the market gets sloppy. Liking the higher low over the 20 SMA. Looking for it to tighten up against the 68.80 level or offer a look below and fail on the 50 SMA to try and get involved.
OUST – Daily Chart
Like CGNX, trying to form a new base after breaking out over the 36.50 level on the weekly chart. Another shakeout at the breakout level or even look below and fail on the 50 SMA could be actionable. If neither of those happen, looking for it to tighten up higher in range before trying over the 50 round number.