The Federal Reserve’s preferred PCE (Personal Consumption Expenditures Price) index was unchanged in May, according to the government data release last Friday.  Economists polled by The Wall Street Journal had forecast a flat reading.  This is a welcome news that inflation is cooling as expected.  If inflation continues to recede in the next few months, the Fed could lay the groundwork to cut U.S. interest rates in the fall.

Despite the great inflation cooling news, all three major index sold off with very heavy volume last Friday.  This is the classic of Wall Street buy the rumor sell the news behavior.  The market initially reacted positively to the inflation cooling news, the S&P 500 and NASDAQ both made new highs right after open.  Around 2:20pm, the sellers showed up and turned the very positive open into a very negative close.  On June 20, the market had a similar intraday trading pattern.  On June 20, the market initially cheered a not so good initial jobless claims data because the consensus is that a soft jobs number will give reasons for the Fed to cut rates.  Then in the mid day, the market realized that a soft jobs number is not good for the economy and the stock market either.  Based on the negative market reaction to a soft jobs number on June 20 and an inflation cooling news on June 28, the stock market is clearly worried about an impactful slowdown that will force the Fed to cut rates to rescue everything.  This is not the circumstance that the market wishes to see.  The market wishes the Fed to cut the rates because they can, but not forced to.

Coincidentally, Nvidia peaked on June 20.  In order to mask the market internal weakness, the rally moved over to enterprise software sector.  In the last few days, semi sector has been going down because the semi sector general Nvidia led the way down.  The enterprise software sector has not been doing well in 2024 at all because the AI revenue is not yet reality for the software sector at this stage.  So the rotation from the semi AI winner to enterprise software sector is not sustainable.  The market is buying time by rotating to a different sector.  Traditionally, the first half of July is a very positive trading period.  The market should stay up for the first half of July if it follows the seasonal pattern.

But, if we look at the chart, the market will have a very hard time staying up for another two weeks.  The internal breadth is weak and the price is full.  Anything good has been picked over.  We need some kind of catalyst to start the correction.  We don’t know what catalysts are waiting in the dark at the moment.  Something will show up to upset the Apple Cart.

Below is the S&P 500 weekly chart.

It is 10 weeks into the weekly cycle that started on April 19.  It has been trekking the upper channel line.  This upper channel line is a 22-month line that is a solid resistance line.  The market will back off from this line.

The true market top is the top in March 2024 when it had broad participation, although small caps never participated since the rally from October 2022.  This top in June 2024 is solely due to the AI rally.  Nvidia is the only company that is truly making money from AI.  The rest of companies are AI imposters.  Broad AI revenue will come in the next 4-year cycle.

We believe this correction off the June/July 2024 high has the potential to be 10-20%.  Finally we can finish the 4-year cycle that started in March 2020.