QQQ gapped up into new all-time highs on Friday. SPY is still below its highs, but not by much. RSP, IWM, DIA, XLF, XLY, XLB, and XLU sold off over the past two months and now look like they’re trying to put in lows and move up, and we are seeing large buying volume come in at the lows. Those volume candles need to hold. If they don’t, breadth is only going to get worse. However, if they do hold and push higher, and we see everything start moving up together, we should get a nice bull market.
SPY Daily Chart
The Levels to Watch
The simplest way I can state it is this: as long as QQQ and SOXX stay above their 100-day SMA, I stay bullish on tech. The QQQ key level is $717 and the SOXX key level is $550, but I would let SOXX drop to $533 to give it some high-beta wiggle room. Closes below those levels would be an issue for the short-term bull thesis.
Right now NVDA, the largest company in the world, is pushing into new all-time highs. AAPL, the second largest, looks like it should stay relatively strong. GOOGL and AMZN continue to hold up even though they’ve been weak for the past several months. TSM looks great and keeps grinding higher. With that setup, I don’t see a high risk of a larger pullback right now. If that changes, the whole picture can change, but as long as the big tech names and the AI trade hold up, the market should keep going higher.
SOXX Daily Chart
What History Says About Q4
Historically, the 4th quarter of a midterm year has been one of the strongest periods of the 4-year cycle. That’s often because we see lows into September or October and then a strong rally that can carry through the rest of the year and into the 3rd year of the presidency. The super bullish stretch often doesn’t kick off until after the election, which usually makes the final two months of the year the time to be long and stay long.
The 3rd year of a presidential term also tends to be the strongest of the four, and by quite a bit. The S&P 500 has averaged 15 to 17 percent in year three, depending on how you measure and which source you use. That’s well above the overall average, which sits in the 10 to 12 percent range.
Historical precedent is not a guarantee. Trump’s first-term midterm year in 2018 stands in sharp contrast to the bullish Q4 data. In 2018, the market rolled over at the start of October and dropped all the way to Christmas Eve, with SPY falling just over 20% from its all-time high. During that period we also had a hiking Fed, rising bond yields, and growing growth fears. Buying into that 2018 drop was one of the best buying opportunities of the last decade. This adds to my conviction that if we do get a 7+ percent drop in SPY and a 10+ percent drop in QQQ, it would make for a great buying opportunity.
SPY 2018 Daily Chart
Right now, QQQ is pushing into new all-time highs, and that’s generally a bullish signal, not a bearish one. We get an ATH trap here and there, but overall you want to see markets make new highs with everything moving up together.
The Plan
Put that together with what I’m seeing in the charts, and if we do get a Q4 drop, here’s how I’m approaching it:
A pullback of about 3%-4% on the QQQ into the 100-day SMA is buyable. That’s where I add bullish exposure.
A close below the 100-day is where I stop buying and hedge. That’s the signal that price is lining up with the macro picture.
A drop of 10% or more is where I buy heavy again. If we get there, I think it’s a great opportunity, like 2018.
Price right now says we don’t have to drop, but if we do, I have a plan.
QQQ Daily Chart
Price is King
There are plenty of headwinds: runaway bond yields, the Iran war, higher inflation, and a Fed in a rate-hike regime, all of which are related. It’s still quite possible this market pulls back. But one thing I never do is fight price. If price says higher, it doesn’t matter how many macro headwinds are out there, I have to follow price and assume higher. If we start breaking 100-day SMAs, then price will start to line up more with the macro picture.