The Fed pivoted to a hawkish tone by advising one rate cut in 2024 at last week’s meeting.  Back in March Fed meeting, the Fed projected three rate cuts in 2024.  This is definitely a hawkish pivot, but the market didn’t care. Apple jumped up 8% last week by releasing AI features at its 2024 Worldwide Developers Conference.  The Apple bulls cheered for a much needed iPhone upgrade cycle, but no one really knows the scale of the iPhone upgrade cycle at this point.  No one has seen an AI app on an iPhone yet.  The AI momentum trade is where money has been made in 2024, people just kept piling money on AI and will continue to pile on AI trade until it doesn’t work.

Underneath the NASDAQ and S&P 500, there are quite a few signs showing the cracks of the rally.

1. The DOW topped on May 16, 2024 and failed to make new highs along with the NASDAQ and S&P 500 in June.

2.  The percentage of S&P 500 stocks above their 200-day moving average peaked at 81.87% in March, right now only 63.20% of S&P 500 stocks are above their 200-day moving average.

3.  The 10-year treasury yield kept falling in defiance of the Fed’s one rate cut message.  The falling 10-year treasury yield is not benefiting rates sensitive sectors, such as regional banks and housing.

4.  Tech accounts for 32% of the S&P 500 stocks.  There is a concentration risk.

5.  The equal weighted S&P 500 failed to make new highs in June.

All these signs are presenting a tired bull market that’s led by the handful mega cap AI stocks.  But the AI led rally could last another 2-4 weeks.  It is important to be respectful of the bullish momentum.

The stock market is not the economy.  The Fed is adamant about using economic data guiding monetary policies this time because they got it wrong last time by staying at 0% for too long.  Unfortunately, economic data is always after the fact, meaning it will be too late for the Fed to start acting on weak economic data to prevent bad things from happening.  The Fed is not proactive, it is only reactive.  Therefore we will always have cycles in the stock market.

We don’t see the present NASDAQ as a bubble like the previous DOTCOM bubble.  The NASDAQ is over valued, but not in bubble territory.  The NASDAQ will enter a correction when the investors finally realize the main street problems.  Right now the low and middle income consumers are really stretched.  The commercial real estate sector is desperate for the rate cutting cycle to start.

The significant bifurcation between the mega cap AI stocks and the rest of stock market will not be resolved without a reset.  We need to wait for the mega cap to come down to finish the cycle.  Based on all the evidence,  we “feel” that the NASDAQ could have a 10-20% correction between July and October 2024.

So we are patiently waiting for the first half of 2024 to finish.  We could see a lot of volatility between July and October.  This is an election year.

Below is the S&P 500 weekly chart.  It is 8 weeks into the currently weekly cycle.  It is pressing against the 22-month upper channel line.  Sometimes breaching the upper channel line could be used as a sell signal to get out the market.  It’s not a short signal, it’s a profit taking signal.