Tech Stocks Returning To Normalcy Ahead Of Next Week Fed Meeting

Stocks bounced back Wednesday afternoon, boosted by tech shares. Earlier, a core inflation reading came in slightly higher than expected and dashed hopes for a larger rate cut.

While the overall consumer price index came in lower than expected last month, core inflation rose 0.3% in August on a monthly basis, slightly more than predicted.

Inflation is still back to levels not seen since 2021, but that may not be enough for markets. The Federal Reserve has signaled it is ready to start cutting interest rates, but the new inflation data seems to favor a cut of 25 basis points, instead of the more aggressive half percentage point cut investors were increasingly counting on.

Price growth continued to soften in the US last month, falling to its lowest level since February 2021 as the Federal Reserve prepares to cut interest rates for the first time since the start of the pandemic.

As inflation continues to fade, the consumer price index rose at an annual rate of 2.5% in August – down from 2.9% in July, and below the 2.6% expected by economists.

On a month-to-month basis, the index rose 0.2% last month, in line with its rate of growth during July.

The so-called “core” CPI reading, which strips out volatile food and energy prices, came in higher than economists expected, rising 0.3% in August. This measure is closely monitored by the policymakers tasked with steering the US economy.

The S&P 500 climbed 1.1% and the Nasdaq 100 rallied 2.2%. It was the first time since October 2022 that each gauge erased an intraday loss of at least 1.5%.

There is a slight pullback in stocks as of late with choppy earnings and economic data, market is expecting more smooth sailing post this initial Fed rate cut and post-election, as uncertainty fades and investors start to price-in 2025 earnings.

While stocks bounced back, sentiment remained “cagey,” there have concerns over a weakening global economy have derailed stocks this month. There is also the added risk of the presidential elections. We could see the recovery falter again later in the week.

It seems that the most recent rally in stocks was the “return to “normal”” stage. Fear comes next. It is not here yet, but this is to be expected.

Fed’s rate cut would disappoint investors who expect two rate cuts, and this would trigger declines.We can also expect some selling off from investors who are worried and get scared of the decline following the rate cut.

We can take advantage of the tech stocks returning to normalcy by getting into positions in these ETFs.

SPDR S&P 500 ETF Trust (SPY)

SPY tracks the performance of the S&P 500 Index. It gives investors exposure to stocks across all 11 sectors in the S&P 500. SPY pays dividend on a quarterly basis. Launched way back in January 1993, SPY was the very 1st ETF listed in the US.

In the meantime, while we might expect some declines if investors expectations of the rate cut is not met, we can actually also look at this ETF.

ProShares UltraPro Short QQQ (SQQQ)

SQQQ is an inverse ETF seeking returns that are -3x the daily performance of the Nasdaq 100 Index. It typically accomplishes this via derivatives such as short positions and swaps. This ETF is suitable for traders looking to profit from a market decline or to hedge their existing positions against one.

Expense ratio is 0.95%. The fund has a correlation of -0.99 with the Nasdaq. SQQQ is best suited as a short-term investment that is intended to serve as a countercyclical bet for investors who believe the stock market will drop in the near-term.

While we are seeing tech stocks showing signs of returning to normalcy, we need to be aware that there could be a possibility of S&P 500 sliding as well.

From the multi-timeframe, we could be seeing a slide in SPY in the short term, but overall, SPY is still strong if it continue to stay above the 50-day moving average.

Appreciate if you could share your thoughts in the comment section whether you think SPY would experiencing a small slide before we see new highs from SPY.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.