Hi Traders,
For the last few weeks, semiconductors were the market's ATM. Every time the market needed money somewhere else, it came out of the chips. That trade has run its course.
This week gave me the tell. Volatility spiked short term, and what rotated during that move told the story.
Most stocks sold off. Breadth (the count of stocks rising versus falling) on Wednesday ran 400 down to 100 up. But the S&P held notably stable, and semiconductors did the heavy lifting, led by Nvidia (NVDA).
Then the market shrugged off renewed tensions in Iran, and it shrugged them off fast. That tells me a lot about the market's appetite for risk right now. So while I'm not piling into semis here, the Nasdaq has room to run.
The way I find trades is one part pattern, one part story. The pattern gives me the setup, and the story tells me why it moves. When both line up, that's a trade worth talking about.
Here's what I see right now. There's a big bull flag forming on the S&P 500 and the Nasdaq (a chart pattern where price pauses in a tight drift after a run-up, usually before another leg higher). That's the pattern.
The story is the mega-caps (the largest companies in the market by value). The biggest names in the index have been the laggards, not the leaders, and that's the part most people are sleeping on.
So this week I love the index that's coiled to break higher, and I leave the trade everyone is crowded into on the other side of the boat. One name that's loading up. One name that's priced for nothing to go wrong.
The Love: QQQ, where the laggards become fuel
My love is Invesco QQQ (QQQ), the Nasdaq, coiled in a bull flag with the biggest names ready to carry it.
Start with the story, because it's the fun part. The mega-caps that are supposed to lead this market have been dragging: Google, Microsoft, Amazon, Nvidia. We've been calling them the Lag 7 (our spin on the Magnificent 7, the megacap tech names that usually lead the market).
They haven't gone anywhere while the rest of the market moved. But look at their charts and they all have room to run back to new highs. The laggards become the fuel.
When the biggest weights in the index finally move, they don't nudge the Nasdaq, they carry it.
Now the pattern. That bull flag is textbook, and there's a second engine underneath it. There's enough premium built into the Qs (trader shorthand for QQQ) on a volatility basis to get sucked out, meaning the market is pricing in big swings that may not show up.
When that air comes out, it pushes the index higher on its own.
The Leave: UUP has no one left to buy
My leave is the US dollar, Invesco DB US Dollar Index Bullish Fund (UUP), priced for perfection with the whole crowd leaning one way.
This one isn't a bearish call. It's a leave.
The hedge funds are sitting at their most bullish on the dollar in 17 months, with net long bets at $33.5 billion. That's from the latest COT data (the Commitments of Traders report, a weekly CFTC snapshot of how the big speculators are positioned), via FOREX.com on July 6.
When everyone is already on the same side of a trade, there's no one left to buy. That's what priced to perfection means.
It doesn't have to fall. It just has no easy room to rise.
We saw similar price action this past Wednesday. With renewed concerns around Iran, almost everything traded as it did in March during the war. The most notable tell: the Dollar Index, the strongest asset during the war, couldn't rally on Wednesday.
This is the top name on my watchlist for a turn. The dollar trades on the US data story, and any hiccup in that data and this crowded position starts to unwind. A slow-moving ETF can move faster than people expect when the exit gets narrow.
If the narrative cracks, I think positions liquidate down toward 27.5 in a hurry. November options aren't priced for a change in the story.
Come hang out.
Enjoy the process,
Tim