We were off-sides yesterday for the first time in over two weeks as our short IWM focus under Red Alert failed.

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Our Red Alert call failed yesterday after ten consecutive days where we accurately predicted the market pullback.

During this time we consistently characterized the dynamics of the pullback as one being caused by deleveraging, which we identified, not through inside knowledge, but through price action.

Yesterday, the deleveraging dynamics behind the scenes were revealed and may have reached a zenith when it was reported that Leopold Aschenbrenner’s $45B fund, Situational Awareness, went bust under the pressure of 4x leverage.

Once this story came out yesterday morning, the market breathed a sigh of relief, realizing the selling was due to mechanical, not fundamental reasons. As a result, AI bottleneck and data center stocks which Leopold had focused on were broadly up 20-30% yesterday in one of the sharpest one-day sector-rallies in recent memory.

Further supporting the sector rebound, South Korea announced a $13.9B AI-focused sovereign wealth fund aimed at halting their own deleveraging crash which had hit the South Korean market over the past month.

Together, these events promptly halted the otherwise inevitable crash in QQQ towards our $635 target level. (QQQ now seems poised for a follow-through day to the upside with a $692 to $700 target today.)

The drama and the market impact of these deleveraging events (and their initial resolution) has completely overshadowed the impact of the FOMC event, and AMZN and AAPL earnings last night.

Incidentally, AAPL did sell off sharply (-6%) after earnings just as we predicted it would right here in yesterday’s morning note. However, where we were wrong is that it essentially had no impact on QQQ due to the overwhelming dynamics of the AI-trade rebound noted above. Further helping that rebound, AMZN reported earnings last night, increasing capex by $20B attributed mostly to higher memory costs, while quantifying and detailing the ROI that investment would bring. That news sent memory and other AI infrastructure stocks even higher in after-hours, further solidifying the current rebound in QQQ.

The market is celebrating and consensus seems to be that the bottom is in. However, we are not yet convinced of that. For one, the unprecedented volatility could easily cause other large fund blowups and contagion. Secondarily, high oil prices, and the recent large pullback in bonds (indicating higher interest rates) still presents a potentially dangerous setup for small caps and IWM.

We agree with consensus that there is likely to be follow-through today. $700 is the 20 DMA for QQQ and the low daily RSI supports a move to that level. But after that, it’s entirely possible that level is rejected and we resume a downward trend and test the recent lows. A lot will depend on daily catalysts as they unfold.

For now, we are upgrading our signal to yellow alert and will only give the all-clear green signal once we have confidence that QQQ can recapture the 50 DMA currently at $715.

Today’s Signal: 🟡

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