Inside Markets — Bullish Recipe

It’s worth noting that NVDA shares may be ‘under-owned’ by the time of its earnings report relative to recent history. Hedge fund selling of Tech for the five days ending 8/22 was ~1.5 standard deviations above the 1-year mean and hedge fund positioning in semis in particular is near 12-month lows (60th percentile).

Market-cap weighted indices (SPX and NDX) are in overbought territory and currently positioned below record highs from mid-July. The NDX is ~7% below its record high from 7/10 and the bearish reversal on 7/11 looks far more ominous than the reversal in the SPX. Mid-September usually kicks off a month-long period of seasonal weakness, while light attendance and a wide-open corporate buyback window keeps the near-term pain trade aimed higher for the next ~2 weeks.

A resilient US economy is the most important variable for the equity outlook. Fed rate cuts and resilient growth should be a bullish recipe for equity markets, while rate cuts in response to a growth scare haven’t historically been associated with bullish near-term outcomes. Equity prices move based on earnings estimate revisions and resilient growth with lower rates should result in higher estimates. Valuation multiples also matter and lower rates will give you higher multiples, all else equal. No one should make an investment decision based on seasonality, but while mid-September is associated with a month-long period of weakness, it’s fair to say that Q4 also tends to be the strongest three months of the calendar year.