To The Moon

The pandemic turbocharged the tech sector, but the latest rally is more about the impact of AI and the potential that its development will drive a new paradigm for profits. The Nasdaq 100 outperformed the S&P 500 last month by the most in more than 20 years, with the tech-heavy index soaring 7.6% to put the broader gauge’s 0.3% rise deep in the shade.

The Invesco QQQ Trust Series 1 (NASDAQ:QQQ), the biggest ETF tracking the Nasdaq 100 index, witnessed $1.8 billion in net inflows in May, the best monthly performance so far in 2023.

Tech rally continues

Investors seem to be betting that companies such as Nvidia Corp. and C3.ai Inc. are going to be proof against the recession so many are predicting for the US, as a result of the Federal Reserve’s savage tightening cycle.

Certainly, the sector’s gains are standing in stark contrast to a number of indicators signaling that some sort of slowdown is coming, or has even arrived. After tracking the ISM Services PMI closely since the pandemic, the Nasdaq 100 has broken higher despite the activity gauge’s sustained declines. 

Bears are hibernating

The technology and communication services sectors account for around 37% of the total S&P 500 index. Within this niche, the combined weight of five tech titans accounts for around 25% of the index: Apple Inc (NASDAQ:AAPL) at 7.9%, Microsoft Corp. (NASDAQ:MSFT) at 7%, Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL) at 3.9%, Amazon.com, Inc. (NASDAQ:AMZN) at 3.1%, and NVIDIA Corporation (NASDAQ:NVDA) at 2.7%.

An equally weighted portfolio made up of these five S&P 500 heavyweights would have gained 62% so far in 2023, compared to the 9.7% performance of the market. 

As these stocks gathered speed and rose in relative weight, investors seized the opportunity to profit from a potential AI boom.

Trade on breakouts only

Today on this QQQ chart, trading is over 60 on the RSI and the VIX is once again close to making new 52-week lows. While these indicators don't tell the whole tale, they are an effective gauge at determining when the market moves up or down too quickly over time. In order to protect one's capital, raising stops here only makes sense.

Friday's economic data is all about May jobs. Any overnight news of the US Senate making progress toward a debt limit bill being signed will also affect markets. A strong jobs report has been frequently discussed as potentially harmful to the FED's mission to bring inflation down to 2%. If people have jobs, then they have money, and they can do little about companies keeping prices high, especially when it comes to the costs of living. 

Goldman Sachs’ Note on Key Jobs Report:

* We estimate nonfarm payrolls rise by 175k in May, below consensus of +195k and the +222k average pace of the last three months. Job growth tends to slow in May when the labor market is tight. We believe this tendency reflects the diminished availability of workers in late spring. The more reliable Big Data indicators also indicate a slowdown in May job growth.

*We estimate the unemployment rate was unchanged at 3.4% (vs. consensus 3.5%), reflecting a modest rise in household employment and unchanged labor force participation (at 62.6%).

* We estimate a 0.25% increase in average hourly earnings that lowers the YoY rate to 4.32% (vs. consensus of +0.3% and +4.4%).

⚠️ Trading Tips: Looking at calls above 353.36 and puts below 351.06 (stronger support at 350). Given the catalysts on Friday, there should be significant volatility and it would be wise to raise those stops to manage one's risk 🙏

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