/ June 02 / Weekly Preview
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Monday:
ISM Manufacturing PMI (53 exp.)
Tuesday:
JOLTs Job Openings (6.82M exp.)
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Wednesday:
ISM Services PMI (53.7 exp.)
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Thursday:
Initial Jobless Claims (213K exp.)
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Friday:
Non Farm Payrolls (85K exp.)
Unemployment Rate (4.3% exp.)
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Monday:
Hewlett Packard Enterprise Company
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Tuesday:
Palo Alto Networks, Inc.
Dollar General Corporation
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Wednesday:
Broadcom Inc.
CrowdStrike Holdings, Inc.
Veeva Systems Inc.
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Thursday:
Ciena Corporation
lululemon athletica inc.
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Friday:
N/A
AI Validation Fuels The Historic Rally
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The S&P 500 closed at a record high last Friday, finishing up +1.43% on the week and posting its ninth consecutive weekly gain. The Q2 rally so far has been one for the history books, with the market advancing +15.45% since April 01, dwarfing the past decade of seasonal performance.
We’re currently running the longest weekly winning streak since 2024, and only the 5th time since 1965 such a sequence occurred - truly an astonishing stat.
The knee-jerk reaction to this market would be skepticism and bearishness. And while some weakness has followed immediately after such streaks, the longer term performance is strongly positive. A single loss occurred in 1989, but the track record is otherwise impeccable.
With that being said, the limits of the Tech / AI / Momentum rally are being put to the test. The QQQ vs SPY relative Z-Score (lower panel) is now sitting at levels which have previously marked the peak of outperformance.
This is not a bearish prediction for Nasdaq themed stocks, it’s just that the probability of excess returns from this particular factor appears to be limited. Anytime the Relative Z-Score was higher than 1 (now it’s 2.09) it was the relative performance of QQQ which suffered, not the absolute one. In other words, tech and momentum leadership tends to be a good omen for the whole market, as capital eventually rotates into other corners and sectors (possibly as profit taking runs its course).
Median SPY 1-Year returns associated with green clusters in the chart below stand at an eye popping +19%, with 99.8% of outcomes positive. This is a stat sure to make any bear mad.
Since today is Portfolio Rebalancing day, we are closely watching our core asset allocation strategy - Enterprise - for changes to the target portfolio. There hasn’t been a meaningful shift in exposure yet, with the system running “full steam ahead” in risk-on mode. Equity allocation stands at 81% versus a 60% benchmark, highlighting the extent to which the current environment is bullish.
From an economic data perspective, April PCE inflation came in at 3.8% year-over-year, with core PCE at 3.3%. The monthly core reading was 0.2%, below the 0.3% consensus, and the softer monthly result strengthened arguments for Fed cuts. A 60 day Memorandum of Understanding between the US and Iran is currently extending the ceasefire and pressuring oil prices lower (at least compared to previous peaks). The combination of softer than expected core CPI and a more relaxed geopolitical situation meant bulls had the upper hand throughout the week.
Dell Technologies delivered an extraordinary fiscal Q1: revenue reached a record $43.8 billion (up 88% year-over-year), with $24.4 billion in AI orders booked and $16.1 billion in AI server revenue recognized. Market reaction intensified after management raised the FY27 AI server revenue target to $60 billion and set full-year revenue at a midpoint of $167 billion—about a 50% year-over-year increase. The results and guidance validated the AI capital-expenditure thesis just as investors were starting to question the sustainability of the rally, strengthening the bull case and increasing upside asymmetry.
Overall, yields retreated modestly and gold went sideways to $4.576. Cryptos are an interesting story right now, as the bear market in Bitcoin continues. Since February of this year, aggregate crypto prices stopped falling, forming a potential floor for the sector (charted below).
Technically speaking, all trends confirm the bullish narrative. The very high deviation in momentum and tech stocks would normally suggest a large corrective phase of mean-reversion lies ahead. However, this usually occurs at very elevated sentiment levels, which we are currently not seeing.
According to our own metric, sentiment stands at just 55/100, with a reading higher than 76 required for us to name it “euphoria”. There is ample skepticism still a factor in investor psychology at the moment, which can only mean one thing: the markets can go higher still.
Of course, that does not mean we won’t get any pullbacks in the near future, especially in areas which are already technically extended. For its part, the market is “not quite there yet”, with a bit more headroom left until the upper limit of the trading channel is hit (around $800 by end of June).
Immediate support stands at $747 (R1), and a truly negative catalyst could take us as low as $714 in the near future. That, of course, would be a buying opportunity in our book.
Our Trading Strategy (Sigma Portfolio)
All is well and fine with our positioning, since we have already been allocated on the long side for the majority of this rally. That being said, we would be increasingly uncomfortable adding to equity exposure at this stage.
This week holds a couple of key catalysts, though trading is likely to be dominated more by algos than by fundamental developments. We’ll get more color on the job market with Friday’s Nonfarm Payrolls report. Broadcom (AVGO) reports Wednesday after the close. On the geopolitical front, the Iran 60-day Memorandum of Understanding still needs formal ratification.
We’ve already started the week on a high note, with the ISM Manufacturing PMI rising to 54 in May (vs 52.7 expected). This was the strongest expansion in the factory sector since May 2022, with faster growth seen for new orders (56.8 vs 54.1), production (54.3 vs 53.4) and backlog of orders (52.2 vs 51.4). This confirms the manufacturing reset narrative and reinforces the bull case for industrials and cyclicals.
ADP private payrolls and ISM Services on Wednesday round out the economic calendar. These two prints are relevant as well, since services dominate US output.
Besides the NFP data point, Broadcom’s earnings are probably the most watched event. Options imply an approximately 7% move on the print, well above the historical average. The most asymmetric outcome would be a beat paired with cautious forward guidance. AVGO currently trades as if management will convert its “$100 billion in AI chip revenue by 2027” guidance into a concrete target; anything short of that — especially if management signals moderated hyperscaler capex — would likely spark broad semiconductor de-risking, a pullback the technicals already suggest is overdue.
Overall, we will maintain our risk-on allocation, similar to last week. However, we are starting to look for profit taking signals and reasons to reduce rather than increase our exposure into the rally.
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I am not a financial advisor licensed in the United States. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject to change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this blog post.
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