QQQ: This Bull Market Isn’t Done Yet

I’ve been steadfastly bullish this yr, significantly on tech and growth-oriented shares. That bullishness has paid off, and we’ve seen an epic rally in development names this yr, led by the tech-heavy Nasdaq. The NASDAQ:QQQ has exploded larger, with solely very small pullbacks on the way in which up. Proper now, we’re within the midst of an extended consolidation, and one which has the potential to be a bit extra significant by way of declines. Nonetheless, whether or not this one morphs right into a mid-single digit pullback or not, I believe we’re going to finish 2023 rather a lot larger that we’re at this time, even after the massive rally up to now this yr.

A lovely chart, however trigger for a pause

Let’s begin with the every day chart of the QQQ, which reveals an especially highly effective uptrend. Nonetheless, as we head into earnings season, we’re within the midst of a consolidation sample. Whether or not this sample holds and resolves upward, or fails and exams decrease help, I nonetheless suppose in the end we go larger. The query is the short-term path, however I believe we’ll get decision on that pretty rapidly.

We are able to see the consolidation sample within the high proper, which I’ve drawn in. The 20-day exponential shifting common corresponds to the underside of the triangle I drew, in order that’s the road within the sand for the bulls to begin. Under, there’s help at $357, and the rising 50-day easy shifting common. I don’t suppose we see a pullback to the 50-day SMA, however I actually want we might; it might be an epic shopping for probability. Regardless, these are the degrees I’m watching, with the 20-day EMA up first, adopted by $357.

Now, there’s a mixture of bullish and impartial readings right here by way of the symptoms. The buildup/distribution line is flying, which merely means we end the day larger than the open as a rule. This can be a signal of accumulation, and accumulation is barely executed when Wall Road thinks costs are going larger.

The 14-day RSI is bouncing off of the 60 degree, which is a bull market conduct. It means the inventory is rarely getting anyplace near oversold, implying bullish momentum is unrelenting.

Within the backside panel, the 20-day price of change is simply 4% for the time being. When the ETF has been overbought, it’s 20-day ROC has been within the 10%+ space; we’re nowhere near that at this time. Once more, this means there’s ample gas to the upside for the bulls.

Lastly, the PPO is displaying a giant damaging divergence given the ETF continues to rise whereas the PPO falls. That is typically an indication of not less than a consolidation, and at worst, could be a signal of a development change. On this case, I’ve a really laborious time believing this damaging divergence is a development change given all the opposite proof we simply checked out. Moderately, it seems to be just like the pause that refreshes.

As well as, seasonality could be very a lot in favor of the bulls within the subsequent a number of weeks.

That is the final 5 years of knowledge, and you’ll see that each one Julys prior to now 5 years have produced larger costs. It will get a lot much less favorable after that, with August at 3 out of 5, and September at simply 1. Nonetheless, for now, we now have one other 2.5 weeks of very bullish seasonality earlier than it cools off.

One other trigger for some warning is sentiment, as measured by the fairness put-to-call ratio, or CPCE. Under I’ve charted the 250-day shifting common in pink, in addition to the 5-day shifting common in blue. The longer common is a yr’s price of buying and selling, with the shorter one being one week. Each provide helpful clues on very totally different time frames.

First, the pink line of the 250-day shifting common has very clearly turned decrease off of its uptrend set in the course of the bear market that took maintain in 2022. This can be a very bullish signal longer-term as which means peak bearishness has handed, which means there are extra fairness patrons out there.

On the shorter-term, we now have a 5-day common of 0.51, which is a really low ranking. You possibly can see we had solely a handful of scores prior to now couple of years that low, and given it is a contrarian indicator, it’s attainable we get an area high in equities. As I discussed earlier than, any native high can be simply that, and never a long-term high.

The previous 4 instances the 5-day common was on this similar space, which I marked with the vertical blue traces and pink downtrend traces within the backside panel, we did see native tops and a few promoting. I’d not rule out a little bit of promoting because of this.

Different concerns

There are a few different issues happening that don’t trigger me to waver from my bullishness for this yr, however do give me pause within the short-term. One is declining liquidity, which has correlated to fairness returns prior to now. This doesn’t in any approach assure it can once more, however the relationship right here is pretty important. You possibly can learn the context right here.

Now, simply because there’s a divergence doesn’t imply we’re going to see some huge selloff. We all know the debt ceiling nonsense from just a few weeks in the past distorted this knowledge, however it’s price watching short-term, and as you’ll be able to learn within the linked article, Morgan Stanley thinks it is best to place bearishly due to it. I’m not in that camp, however it is a potential threat to the bull case short-term.

Yet another factor to think about that’s particular to the Nasdaq-linked indices is that the Nasdaq-100 is rebalancing as a result of overwhelming dominance of the Magnificent Seven in 2023. They’ve reached ranges of dominance that don’t match the principles of the index, and due to this fact are being artificially rebalanced to decrease weights. This can be a very rare occasion and has the potential to have unknown penalties. Presumably, any fund that’s Nasdaq-linked should promote a few of the 2023 leaders in favor of names which are being rebalanced with larger weights. Longer-term, I don’t suppose this adjustments something, however once more, it’s a short-term velocity bump for the index to get via.

The underside line

If we put all of this collectively, we now have a consolidating chart, very bullish seasonality, and a few short-term potential headwinds within the type of overly bullish sentiment, declining liquidity, and an index rebalancing. I’m watching the 20-day EMA, which has to date held, and $357 beneath that. So far as I’m involved, the bigger the pullback, the higher, as it can present higher shopping for probabilities, however regardless of what this consolidation finally ends up doing, I’m very bullish QQQ the remainder of this yr.