OVERVIEW
Morning Setup

• Tuesday: SPY fell 0.70%, QQQ 1.27%, MDY about 1% and IWM around 1%. Seven of 11 sector groups finished lower, so the selling was broader than another isolated technology move.

• SPY: Closed at 761.72, still 0.93% above its 50 day average. Nearby support around 760.50 is now more useful than the recent high at 779.37 for judging today’s tape.

• QQQ: Closed at 707.64, roughly 0.47% below its 50 day near 710.98. The first job is to get back above that average.

• MDY and IWM: Both are more than 2% below their 50 day averages. IWM’s decline came on 2.55x normal volume, the strongest evidence of real selling among the four benchmark ETFs.

• Premarket: At 6:57 a.m. ET, Dow futures were down 0.15%, S&P 500 futures 0.25% and Nasdaq 100 futures 0.52%. Dell is sharply higher after raising its full year outlook, while most mega cap technology names are softer.

• ADP: Private employers added only 38,000 jobs in August, below expectations around 47,000 and down from July. The number gives us a softer labour market read ahead of Friday’s payroll report.

• Rates: The 10 year Treasury yield is around 4.80% to 4.81%, close to its highest level in almost three years. The 30 year is around 5.28%.

• Oil: Brent traded as high as $97.04 overnight before easing to around $94.08 by 7:35 a.m. ET. WTI has pulled back to roughly $89.50 after touching $92.29.

• Tonight: Broadcom reports after the close, providing another important read on AI infrastructure demand after strong results from Nvidia and Dell.

The market is not in a full technical breakdown though it has become noticeably weaker. SPY and RSP are still holding above their medium term averages, while QQQ, MDY and IWM are not. We want to see some of those breaks repaired before increasing exposure again.

MARKET ANALYSIS
Tuesday Added More Damage

Tuesday’s decline carried more weight than Monday’s. SPY closed at 761.72, QQQ at 707.64, MDY at 680.04 and IWM at 290.61. Seven of 11 sector groups declined, with Technology down 1.52% and Consumer Discretionary among the weakest areas. Energy, Utilities and Health Care were the main groups bucking the decline.

The index structure has now split quite clearly and we see the SPY is still above its 50 day. QQQ has slipped just below its own. MDY and IWM are considerably weaker, both sitting more than 2% below trend.

Volume adds another layer with the SPY and QQQ trading around 1.06x and 1.07x their 20 day averages. MDY was at 1.16x. IWM stood out at 2.55x average volume while falling.

We would not ignore that as the small caps were already struggling around the 50 day before Tuesday. A further decline on more than twice normal turnover is stronger evidence that investors are cutting exposure there, rather than simply waiting out a quiet pullback.

That does not automatically mean SPY and QQQ must follow, but it makes the broadening argument much harder to defend for now.

SPY Is Sitting on the First Level That Matters

SPY remains the strongest chart of the four as it closed at 761.72, around 0.9% above its 50 day average. Nearby support sits around 760.50, so we are essentially testing that area already.

This is more relevant today than resistance at 779.37 and the recent high can wait and if the SPY holds around 760 and buyers begin stepping in, the larger structure remains intact and Tuesday can still be absorbed without much technical damage to the S&P.

If 760 gives way, the 50 day becomes the next obvious test and the SPY’s decline came on slightly above average turnover rather than the type of heavy volume we are seeing in IWM, so there is no evidence yet of aggressive large cap distribution.

We would still give SPY some benefit of the doubt here.

QQQ Has Lost Its 50 Day Again

QQQ closed Tuesday at 707.64, leaving it about 0.47% below the 50 day average at 710.98 and that now puts Nasdaq back into repair mode.

The break is small, and volume at 1.07x average is not extreme, so we would not call this a major breakdown from one close alone.

But QQQ has now spent several weeks moving back and forth around this average after the failed August breakout. Repeatedly losing and reclaiming the same level is a sign that the clean uptrend has become less settled.

For today, 711 is the number to watch and a move back above it that holds through the session would help with continued trading beneath it, particularly if yields remain around 4.8% and technology selling picks up again, would keep the pressure on.

The next nearby downside level in Swingly’s data is around 702.70. That is useful if weakness continues. We do not need to jump straight to the much deeper levels that appeared in earlier reports.

On the upside, the larger repair still sits in the 728 to 735 area, but that is not today’s job, but first, QQQ needs its 50 day back.

Mid Caps and Small Caps Are Very Weak

MDY closed at 680.04, roughly 2.2% below its 50 day and the IWM finished at 290.61, also around 2.2% below trend.

Those are no longer marginal breaks and for MDY, the first recovery area is around 685.60, followed by the 50 day itself closer to 695 whilst for IWM, getting back above roughly 292.70 would be a start, but the 50 day sits higher still.

The difference between these two indexes and SPY is becoming meaningful as a week ago, mid caps and small caps were useful evidence that participation outside mega cap technology remained healthy. We cannot make that argument today.

They now need to prove themselves again and the IWM deserves particular attention because of Tuesday’s volume. A move back above 292 to 293 after a high volume flush would improve the picture. Another heavy volume decline would suggest the weakness is becoming more persistent.

Equal Weight Is Holding, but Only Just

There is still one useful positive underneath the market as the RSP remains roughly 0.47% above its 50 day average, even after falling around 0.8% Tuesday.

That tells us the average S&P 500 stock has not broken its medium term trend yet and the QQQE is slightly weaker and now sits about 0.21% below its own 50 day.

So the equal weight picture is no longer strong enough to offset everything else, but RSP is still preventing us from calling this a synchronized market breakdown.

The next few sessions should settle that and if RSP holds while QQQ reclaims its 50 day and MDY or IWM begin recovering, we can reasonably treat the current weakness as another rotation inside a larger uptrend.

If RSP joins QQQ, MDY and IWM below trend, there will be much less left to argue with.

Yesterday’s Data Did Not Help the Bond Market

Tuesday’s economic releases were not particularly friendly for anyone hoping yields would settle.

The ISM Manufacturing Index eased to 54.6 from 55.6, but manufacturing remained firmly in expansion. More importantly, the prices paid index stayed elevated at 71.1, with manufacturers continuing to report higher costs for steel, aluminium, copper, fuel, memory and semiconductor components.

JOLTS also showed 1.05 job openings for every unemployed person, up from 1.01 in June.

That combination gave the Fed little reason to become more relaxed about inflation.

This morning’s ADP report provides a softer counterpoint as private employment grew by only 38,000 in August, below the roughly 47,000 expected and below July’s 44,000 increase.

We would not read too much into one ADP number, particularly before Friday’s official payroll report, but it is the first piece of data this week that clearly points toward softer hiring.

The question now is whether that is enough to take some heat out of yields when inflation pressure from energy is moving the other way.

Oil Spiked, Then Came Back From the Highs

The overnight move in crude was dramatic and brent reached $97.04 and WTI $92.29, the highest levels since late July, after the largest exchange of U.S. and Iranian strikes in several weeks. Prices have since eased, with Brent around $94.08 and WTI near $89.50 by 7:35 a.m. ET.

The United States struck Iranian military targets near the Strait of Hormuz, including air defences and maritime assets. Iran retaliated against U.S. bases across the region, while the Revolutionary Guards said two oil tankers had been disabled by mines in the strait.

At the same time, supply has not stopped flowing completely as the U.S. Energy Secretary said 17 million barrels of oil crossed Hormuz on Monday, the highest daily volume since the war first disrupted traffic.

That helps explain why crude has backed away from the overnight highs whereas for equities, oil around $94 is still a problem. It keeps inflation risk alive just as markets are increasing the probability of another Fed hike.

But there is an important difference between oil briefly trading at $97 and continuing straight through $100.

The 10 Year Is Getting Uncomfortably Close to 5%

The bond market remains the bigger issue for equities and the 10 year Treasury yield is around 4.8%, near its highest level in almost three years, while the 30 year is around 5.28%.

Markets now assign roughly a 68% probability to a September Fed hike, up from about 37% a week ago.

There are several forces behind the move with Oil raising inflation concerns. Warsh has put price stability back at the centre of the Fed discussion. Government borrowing remains heavy. Global yields are also moving higher, which makes this bigger than a U.S. Treasury story.

The 5% level on the 10 year is increasingly worth watching. We would not treat it as a magical line, but it is psychologically important and would make bonds much more competitive with equities.

Higher yields also increase borrowing costs and put more pressure on valuations, particularly for businesses where a large part of the expected earnings sits several years into the future.

QQQ is naturally more exposed to that pressure than SPY.

Dell Shows AI Demand Is Still Strong

There is still plenty of strength at company level. Dell is up close to 10% premarket after raising its full year revenue and earnings forecasts on very strong demand for AI servers. Quarterly revenue rose 58% to a record $47 billion, ahead of the $44.92 billion Wall Street estimate.

The order book was particularly strong. Dell reported around $60 billion of AI server orders and a $95 billion backlog, then raised its annual revenue forecast from $167 billion to $192 billion and its adjusted EPS target from $17.90 to $25.50.

That is another useful reminder that the pressure on technology stocks is not coming from a collapse in AI demand.

The fundamental numbers remain very strong. The problem for markets is that strong earnings are currently competing with a much tougher rates backdrop.

Broadcom reports after the close tonight, which gives us another read on the same theme.