QQQ: Stock market gains may fade quickly

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It’s certainly been an explosive week for the Invesco QQQ ETF (Nasdaq:QQ), up 7%, echoing a rebound in March. A move of this magnitude is sure to get a lot of people excited.But let’s face it, nothing has changed this week The outlook for the QQQ, only finally bounced back after seven straight weeks of declines.

The only good thing about QQQ is that the Fed minutes did not reveal anything new. This has helped drive down implied volatility levels across the market, leading to a frenzied buying frenzy. But judging by the weight of the evidence, the QQQ and Nasdaq rallies appear to be nothing more than mechanical rallies from the unwinding of implied volatility.

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Bloomberg

Rates appeared to have no opinion on the FOMC minutes, but remained virtually unchanged after their release. From May 24, the day before the Fed minutes, until the close on Friday, May 27, there was no major change in the future rate hike path of Eurodollar futures.

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Bloomberg

The U.S. Treasury yield curve was also unchanged after the release of the minutes of the Fed meeting. Therefore, if there is a dovish surprise in the Fed minutes, the interest rate market will certainly not react to this change in tone.

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Bloomberg

Some concluded that the rally in stocks and the QQQ was a risk-reducing event, sending implied volatility lower into the 3-day long weekend. This means that there is a good chance that hedging will start on Tuesday and implied volatility will start moving higher again.

Will the buying frenzy of QQQ and the stock market continue for a few more days or even weeks? certainly. But it depends on how the market views next week’s volatility after the long holiday weekend. Suppose investors start to get complacent about the path of monetary policy. In this case, protection demand could fall further, pushing down implied volatility, which could help boost the QQQ further.

The Nasdaq 100 Volatility Index is VXN, which is the equivalent of VIX. Just the VIX measures the implied volatility of the S&P 500. The two are closely related, so I’ll use the VIX going forward because it’s better known and used as a measure of implied volatility.

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Transaction view

The VIX has bottomed out around the 25-26 level since early May. It makes 25 to 26 areas crucial; if the VIX continues to move lower this week into a few macro data points such as the ISM manufacturing PMI and the BLS jobs report, there is a good chance the market will bounce back further. However, if the VIX starts to break above 30, all the gains from the past week will be wiped out.

The VIX is likely to rise again this week. As VIX pointed out, starting in December, the jobs report has become more important to the market. Employment reports for December, March and May showed the VIX at the upper end of its trading range. Meanwhile, reports for January, February and April found lower VIX.

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Bloomberg

The volatility in the VIX is likely due to very low expectations for any policy shift at the January FOMC meeting, and no FOMC meeting in February. Also, as with other months, the April jobs report is not important since there is no FOMC meeting. The June FOMC meeting could mean the jobs report will be very important, which could be enough for traders to seek a hedge in this week’s report.

Not only do these factors challenge a sustained long-term rally, but we have to remember what the Fed wants, which is to keep inflation down substantially. The Fed wants financial conditions to tighten, and if it thinks financial conditions are too loose, the Fed could step up its rhetoric and start pushing markets back to where it wants. This means that financial conditions will be neutral and potentially restrained over time, depending on how the Fed minutes are read. This is the biggest risk to QQQ, which will make the fight against the Fed a challenging task.