Why this rally could be short lived but investors are buying into QQQ, SOXX and selling SPY
Equities jump after options expiry day, April 19. But the rally could be short lived ahead of a busy week
In a text book manner, it was options expiry day April 19 so the market' pull back from its record all time highs was naturally going to be exacerbated. Shorts were exercised, the ASX200 $S&P/ASX 200 (.XJO.AU)$ dropped 0.98% on Friday, and then rose up 1.1% on Monday April 22, with market participants effectively buying positions they shorted, so they could lock in profits.
In a text book manner, it was options expiry day April 19 so the market' pull back from its record all time highs was naturally going to be exacerbated. Shorts were exercised, the ASX200 $S&P/ASX 200 (.XJO.AU)$ dropped 0.98% on Friday, and then rose up 1.1% on Monday April 22, with market participants effectively buying positions they shorted, so they could lock in profits.
This scenario will probably play out in the US on Monday, after the S&P500 $S&P 500 Index (.SPX.US)$ lost 0.9% on Friday (their options Expiry day April 19), which takes the S&P500 now down 5.6% from its highs.
Aside from options transactions fuelling market volatility, the market's fear gauge, spiked to a five-month high on April 19, before the VIX retreated back down. That said the VIX is at 18, which is an almost six-month high. Despite the market being on edge, investors have been seen tactically buying the dip into the big tech, and semiconductors, taking advantage of ‘oversold’ conditions.
Investors are playing it a little safe until this week's data can push the broad market up. But investors are being tactical, buying into oversold ETFs, QQQ and SOXX
We have consistently received stronger than expected economic signals, as such bets have unwound of Fed interest rate cuts this year which is why bond yields are back at five-month highs. So investors are exercising caution, which illustrates why we've outflows from the world's biggest ETF, the S&P500 SPY $SPDR S&P 500 ETF (SPY.US)$ , with $1.2 billion coming out last week and $11.08 billion being withdrawn over the month. While investors have been buying into bonds via iShares Core US Aggregate Bond ETF $iShares Core US Aggregate Bond ETF (AGG.US)$ and the SPDR Bloomberg 1-3 Month T-BIL ETF, $SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL.US)$ to build safety nets into their portfolios.
We have consistently received stronger than expected economic signals, as such bets have unwound of Fed interest rate cuts this year which is why bond yields are back at five-month highs. So investors are exercising caution, which illustrates why we've outflows from the world's biggest ETF, the S&P500 SPY $SPDR S&P 500 ETF (SPY.US)$ , with $1.2 billion coming out last week and $11.08 billion being withdrawn over the month. While investors have been buying into bonds via iShares Core US Aggregate Bond ETF $iShares Core US Aggregate Bond ETF (AGG.US)$ and the SPDR Bloomberg 1-3 Month T-BIL ETF, $SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL.US)$ to build safety nets into their portfolios.
Why? Well the Fed is being data dependent, so investors are now acting accordingly. This week's eco’ data (see below) will need to reverse the trend and prove the economy needs a lifeline, for interest rate cut-bets to be put back on the table and support an equity rally. At same time, the market also needs to see stronger company earnings (including from Mag-7 companies this week), which would also support a potential technical rally gaining legs.
We know the benchmark for company earnings has been set low this quarter, with overall earnings being downgraded 1.1% and tech earnings being downgraded by 1.7%. So we have a set up here that is getting some a tad exciting for some, as the Nasdaq-100, is down 7.6%, in oversold territory, with an RSI of 29. So we have investors thinking tech earnings, will deliver the goods.
- As such looking at global ETF flows, $3.6 billion in flows has gone into the QQQ $Invesco QQQ Trust (QQQ.US)$ ETF over the week, $2.08 billion has been invested over the month, - Meanwhile, ahead of Intels $Intel (INTC.US)$ earnings this week, money is also going into leveraged Semiconductor ETFs, we’ve seen $900 million of ETFs flows go into Semiconductor leveraged ETF, SOXL $Direxion Daily Semiconductor Bull 3x Shares ETF (SOXL.US)$ last week. Semiconductors have copped a blow lately with Nvidia shares down 20%, TSMC down 17%, with the SOXX ETF down 17%.
What to watch and expect this week: Data to show the Fed can keep rates higher for longer
We are thinking caution remains and downward pressure on markets may be exacerbated PCE - the Fed’s preferred inflation gauge, and GDP blow hotter than expected, and if company outlooks and earnings results disappoint. On Aril 26 Core PCE Deflator is expected to show inflation rose from 2.5% YoY to 2.6% YoY amid hiring rising and higher weekly earnings. Bloomberg sees that the Fed’s preferred inflation gauge PCE likely rising back above 3% in the second half of this year. This would put pressure on company’s margins.
On April 25, real GDP is expected to show growth slowed to a 2.7% pace (according to Bloomberg estimates) in 1Q following the prior 3.4% quarter on quarter yearly rate (or 4.2% average growth in 2H23). That’s still above the longer-run sustainable pace of 1.8%, according to FOMC projections. And this ladies and gents, suggests persistent inflationary pressures. Real GDP likely cooled to about a 2.7% pace in 1Q following 4.2% average growth in 2H23. That's still above the longer-run sustainable pace of 1.8%, according to FOMC projections, suggesting persistent inflationary pressures.
If you are looking at data trends to watch? Bloomberg estimates that residential investment will be a bright spot amid pent-up demand for housing and a dip in mortgage rates. But, resilient domestic consumption will likely lead to a wider trade deficit. Bloomberg estimates that business investment weakened with most CEOs not revising capital-spending plans amid election uncertainty and higher capital costs.
Stock watch amid this make or break week: In this week's spotlight we covereverything you need to know about Tesla. Will it tumble or rally? Why its shares could hit $200 but some think it won’t recover until next year. Plus we cover US defense contractors Lockheed Martin and Northrop Grumman reporting this week, as well as Mag-7 names Meta, Microsoft, Alphabet, and Intel, and Exxon, which has quietly overtaken Tesla in market cap by the way.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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