Market Outlook With approximately 2/3 of S&P 500 companies reporting Q2 earnings thus far (according to FactSet), S&P 500 earnings are up 10.3% YoY. For the Russell 2000, Q2 earnings are up roughly 19% YoY and Nasdaq 100 earnings are up 28% YoY. There is nothing bearish about those results. In fact, this is one of the best quarters for Russell 2000 earnings in years, according to Hedgeye. US equities reacted negatively to last week’s weak jobs data, but that kneejerk reaction was short-lived as rate markets and equities are now pricing in more rate cuts and sooner rather than later. That’s bullish. The other thing that is bullish for the Russell 2000 is that it is a consensus short position in the hedge fund community. This means that there is potential for a sharp rise in small-caps if those hedge funds shorts find themselves on the wrong side of the market and need to cover. According to the CME FedWatch Tool, odds of a rate cut by the September 17 FOMC meeting are 93.2%. In fact, rate markets are pricing 3 consecutive 25 basis point rate cuts over the next 3 FOMC meetings.

Technical Review The September S&P 500 futures ended fractionally lower on Wednesday, settling @ 6396.25 (but a ripping higher after the close on earnings). Upper Bollinger band resistance is 6444. Lower Bollinger band support is 6237. According to Tier1 Alpha, option dealer gamma remains in positive territory as of Wednesday’s close. When option dealer gamma is positive, option dealers sell strength and buy weakness to hedge their exposure. Positive gamma for option dealers increases the odds of LOWER realized volatility and SMALLER percentage moves up or down from one day to the next. Market Outlook On Wednesday markets were surprised by a hawkish Powell press conference which triggered a sharp rally in the US Dollar Index, higher treasury yields and a dip in equities. Copper literally crashed 20% in one day. However, MSFT and META crushed earnings expectations after the closing bell and shares are up roughly 6% and 8% respectively. This 5-minute NQ chart tells the story, including the after-hours rally…

The S&P 500 and Nasdaq 100 both eked out fresh all-time highs on Thursday while the small-cap Russell 2000 index dropped -1.28%. In the very short run (next couple of trading sessions), the S&P 500 and Nasdaq 100 are susceptible to a 1% to 2% pullback based on overbought RSI readings and limited upside potential within the context of Hedgeye’s daily risk range. All 1 to 2 day pullbacks in recent weeks have proven to be buying opportunities, and we will view the next dip as another opportunity to add new bullish option positions.