MARKET ANALYSIS
Here’s All You Need To Know

• The market is trying to stabilize this morning, but the macro backdrop has become more complicated after another hot inflation print.

• Yesterday, CPI reminded traders that inflation is not dead. Today, PPI confirmed the same message, with producer prices rising 1.4% month over month and 6% year over year, materially above expectations.

• This is no longer just a “growth is extended” issue. The market is now dealing with hot inflation, elevated oil, and a Fed that has far less room to become supportive.

• Oil remains central to the story. WTI is still trading above $100, and Brent is holding near $107, with the Iran conflict continuing to disrupt tanker activity and keep energy risk elevated.

• If oil stays firm, inflation pressure remains harder to ignore. That is especially important for rate sensitive areas like real estate, consumer discretionary, and the more expensive parts of technology.

• The interesting part is that the market is not breaking. Despite hot CPI, hot PPI, and oil still above $100, Nasdaq futures are holding up better than the Dow because semiconductors are trying to stabilize again.

• We did get very strong bounces yesterday across technology, semiconductors and growth. XLK, XSD, and many of the leading growth names held or bounced from their rising 10 day EMAs, which shows buyers are still defending short term trend support.

• That is constructive, but the problem is still the larger extension on the intermediate trend. These groups may be holding their 10 day EMAs, but on the weekly structure many of them are still extremely stretched after a huge multi week rally.

• This is the key distinction. Short term support is still being defended, but intermediate term risk reward is no longer clean because the weekly trend is already very extended.

• Nvidia, AMD, Micron and SMH are all catching a bid this morning after Jensen Huang joined Trump’s China trip, which has reignited some hope around China access and potential chip related progress.

• That said, we would be very careful not to confuse a bid in semiconductors with a clean entry point. The group is still extremely extended after a huge rally, and chasing semi breakouts here offers poor asymmetry.

• This remains the contradiction in the market. The AI trade is still the strongest force in equities, but many of the leading growth groups are technically stretched at the same time inflation and oil are reaccelerating.

• The market can continue higher, but it is no longer an easy environment where every growth breakout should be bought blindly.

• We are also starting to see rotation under the surface. Yesterday, healthcare, consumer staples and financials outperformed, while consumer discretionary, technology, industrials and materials lagged.

• The China trip is also important. Trump meeting Xi, with CEOs like Jensen Huang, Elon Musk and Tim Cook involved, could become a meaningful catalyst for trade, AI and semiconductor sentiment.

• If the market gets a positive China headline while semiconductors are still being supported, the Nasdaq can remain resilient in the short term.

• The risk is that hot inflation and higher oil keep pressure on yields. The 10 year is still around 4.46%, and if yields start pushing higher again, the market will have less tolerance for expensive growth valuations.

• Earnings remain very good, AI demand is still real, and Morgan Stanley raising its S&P 500 target reflects the fact that this rally is still being driven by profit growth rather than just multiple expansion.

• But the short term setup is more fragile than it was a few weeks ago.

• We would still avoid chasing the most extended growth groups here and instead focus on pullbacks, fresh bases, and areas where relative strength is improving without already being overextended.

• Today’s focus: watch whether semiconductors can hold their bounce, watch whether oil stays above $100, and watch whether the market can absorb the hot PPI print without yields breaking higher

S&P 500

44.33%: over 20 EMA | 49.90%: over 50 EMA | 53.87%: over 200 EMA

• The S&P 500 pulled back into its rising 10 day EMA yesterday, which was the level we expected to be tested after such an extended rally.

• Relative volume was still low at 73% of the 20 day average, but this was the highest relative volume session we have seen since April 30th, which does make the pullback more meaningful.

• The important point is that the pullback did meet some demand, but the volume profile is not completely clean.

• At yesterday’s lows around $731.83, the visible range volume profile showed roughly 7M shares traded red versus only 4.75M shares traded green, which shows meaningful seller aggression at that level.

• There is also now a lot of trapped buying above current price, with the prior all time high at $740.79 showing roughly 9M shares traded green versus only 3.4M shares traded red.

• That matters because if price fails to reclaim those highs, those trapped buyers can begin acting as overhead supply.

• The SPY is still materially extended, sitting around 7.54 ATR multiples above its 50 day EMA, or roughly 7.62% above that level.

• After a 17% rally in 42 trading sessions, for an ETF that normally moves around 0.78% per day, a pullback is not only healthy, it is highly probable.

• Breadth is also showing that the index is not as strong under the surface as the cap weighted price suggests.

• Only around 44% of S&P 500 stocks are above their 20 day EMA, and only around 50% are above their 50 day EMA.

• The SPY is being held up disproportionately by the cap weighted mega cap side of the market, while RSP, the equal weighted S&P 500, is showing more weakness.

• That does not mean the market is breaking, but it does mean the index level is hiding a lot of internal cooling.

Nasdaq

54.45%: over 20 EMA | 53.46%: over 50 EMA | 57.42%: over 200 EMA

• The Nasdaq continues to hold up better than every other major segment, but it is also still extremely extended.

• QQQ is sitting around 9 ATR multiples above its 50 day EMA, and yesterday it briefly touched around 10 ATR multiples, which gave us the exact type of parabolic short condition we were looking for.

• The ideal parabolic short target would have been the rising 10 day EMA at $690.60.

• We did not quite reach that level, with price pulling back only to around $696.64, so from our perspective the downside in the Nasdaq may not be finished yet.

• Yesterday’s candle was a higher relative volume hammer, which normally shows demand, but the visible range volume profile still shows trapped buyers above current price.

• Above the current price, there are roughly 6M shares traded green versus only 2.1M shares traded red, which can act as supply if the Nasdaq fails to continue higher.

• There was also real buyer demand at the lows, with roughly 4M shares traded green versus 2.6M shares traded red, so this is not weak price action by any means.

• Breadth is stronger in the Nasdaq than in the SPY, with around 54% of stocks above the 20 day EMA, 54% above the 50 day EMA, and 57% above the 200 day EMA.

• The Nasdaq remains the strongest part of the market, but this is still not the area where we want to chase fresh opening range high exposure.

• Long exposure only really makes sense on pullbacks into weakness because the technical extension is too high for clean asymmetry at marginal highs.

• The Magnificent Seven remain the most important group in the U.S. equity market because they are still driving both the Nasdaq and the cap weighted S&P 500.

• Yesterday’s pullback in the MAGs came on low relative volume at around 58%, and price pulled back toward the rising 10 day EMA.

• We need to be very specific with where we enter, how much extension we are accepting, and whether the group we are trading is showing fresh relative strength or just late stage continuation.

S&P 400 Midcap

39.50%: over 20 EMA | 56.75%: over 50 EMA | 54.30%: over 200 EMA

• Mid caps have seen a steep short term breadth reset and only around 39.5% of MDY stocks are above their 20 day EMA, but roughly 57% remain above their 50 day moving average.

• That is actually a constructive reset because it shows short term weakness without longer term structural damage.

• A lot of stocks have broken below their 20 day moving averages but are still holding their 50 and 200 day moving averages, which tells us demand is still present on higher timeframes.

• Yesterday’s price action supported that view as the MDY pulled back toward the rising 20 day EMA, around $661.17, and was immediately bought.

• At that level, the visible range volume profile showed roughly 180,000 shares traded green versus 97,000 shares traded red, which is close to a 2 to 1 buyer imbalance.

• The candle also had a wide range of roughly 1.8%, which is around 1.4 to 1.5 times the expected average daily range.

• This 20 day EMA also held on the prior dip at the end of April, so for now this remains a valid pullback long area.

• The only thing to monitor is the rising relative volume on the move lower.

• But overall, MDY looks much more reset now, and that gives it room to start showing relative strength again.

Russell 2000

42.94%: over 20 EMA | 62.24%: over 50 EMA | 57.94%: over 200 EMA

• Small caps remain stronger than mid caps as a greater percentage of IWM stocks are above their 20 day, 50 day and 200 day EMAs, which confirms stronger breadth.

• IWM also pulled back yesterday, but the pullback was shallower than the mid caps.

• It did not aggressively break below the 10 day EMA or test the 20 day EMA, which shows better relative support.

• IWM is still more extended than MDY, sitting around 4.6 ATR multiples above its 50 day EMA, so there is less clean asymmetry than in mid caps.

• That said, the same general framework applies.

• Small caps and mid caps tend to move together because the same risk appetite usually drives both areas.

• We still believe IWM has further upside, especially because it remains a relative strength leader versus MDY.

• The caveat is extension as the IWM is stronger, but MDY is more reset and that means IWM remains a cleaner relative strength proxy, while MDY may offer slightly better pullback asymmetry.

FOCUSED GROUP
BOAT: Global Shipping Ready For Big Move

• Our focus group today is BOAT, the global shipping ETF which has a 90 relative strength rating versus the SPX, which makes it one of the strongest groups in the market right now.

• It is currently building a volatility contraction pattern that has been forming since May 5th.

• Over the last seven trading days, price has been tightening with lower highs and higher lows, which is exactly what we want to see inside a VCP structure.

• Price is also consolidating above a dense visible range volume profile level around $42, which suggests this is a meaningful demand area.

• The 10 day moving average is holding, the average true range is contracting, and the candles are becoming tighter.

• This is also happening while WTI crude oil is contracting on its weekly structure, which matters because crude and global shipping have been moving closely together over the last several months.

• When crude expands, global shipping often follows, and BOAT is already showing the type of compression we want to see before a possible expansion.

• BOAT can look defensive from a macro standpoint, but as traders we care most about price, volume, relative strength and structure.

• Right now, the price and volume structure is strong and the key trigger would be a breakout from this tightening range with expanding relative volume.

• If BOAT breaks higher with volume, we would expect the strongest individual shipping names inside the ETF to follow.