The Daily Breakdown looks at the Fed’s decision to cut rates by 50 basis points instead of 25, and looks at the lagging Nasdaq 100.
Thursday’s TLDR
- The Fed cuts 50 basis points instead of 25
- Mega-cap tech has been lagging the recent rally
- Gold hits a new all-time high
What’s happening?
BODY: Yesterday’s big debate was whether the Fed’s first rate cut in more than a year would be for a standard 25 basis point reduction or a larger 50 bps cut.
The Fed decided to go big, cutting rates by 50 basis points, while signaling a further 50 basis points worth of rate reductions by year end. With two meetings left this year (one in early November and one in mid-December) that would seemingly suggest the Fed will cut by 25 basis points in each — provided that inflation and the labor market don’t roar higher.
Stocks initially popped on the news yesterday afternoon, but closed slightly lower on the day as investors digested the news. However, this morning looks brighter.
In pre-market trading, the S&P 500 is up 1.5%, the Nasdaq 100 is up 2%, and small caps via the Russell 2000 are up almost 3%. Ethereum is edging out Bitcoin, although both are higher this morning, up 3% and 2.5%, respectively.
While markets may have closed with some uncertainty yesterday, investors are decidedly more bullish this morning.
Remember what we have talked about: Lower rates are a good thing for stocks and crypto, provided that the economy holds up and earnings growth remains strong. If those pillars waver — or if inflation reignites — then we could see increased volatility.
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The setup — QQQ
The Dow and S&P 500 have both made all-time highs this week, but the Nasdaq 100 hasn’t done so since mid-July. In other words, mega-cap tech has been lagging the overall market.
Looking at the QQQ ETF below, the pullbacks continue to get more shallow, but the rallies keep petering out.
Yesterday’s action tried to clear downtrend resistance, but investors’ indecision following the Fed left the QQQ below this measure. However, with this morning’s rally underway, bulls are hoping the ETF will clear this level today.
It’s quite straightforward: If bulls believe tech will play catchup and hit new highs like the S&P 500, they want to be buyers of the QQQ. If it really does mimic the S&P 500, a move to $500+ could be on the table.
However, if the QQQ breakout fails and the ETF drops back below downtrend resistance, the recent lows near $450 could be back in play.
Options
Investors who believe shares will break out — or those who are waiting for the potential breakout to happen first — can participate with calls or call spreads. If speculating on the breakout rather than waiting for it to happen first, make sure to use enough time until expiration.
For investors who would rather speculate on resistance holding, they could use puts or put spreads.
To learn more about options, consider visiting the eToro Academy.
What Wall Street is watching
FDX – FedEx is set to report its fiscal Q1 earnings after the market closes. Analysts expect year-over-year revenue and profit growth, largely driven by cost-cutting initiatives implemented last year. Despite declining shipping demand, FedEx has managed to maintain profitability. However, the company will face challenges ahead as it loses its USPS contract to rival UPS, which could impact future revenues.
GOLD – Gold prices closed lower yesterday, but hit a fresh record high after the Fed announced its 50 basis point rate cut. The metal is up an impressive 25% so far this year — outpacing the S&P 500.
PLTR – Yesterday’s slight decline ended Palantir’s eight-day rally, but not before it hit another 52-week high. Amid the recent rally, the stock has hit a new one-year high in seven of the last nine sessions, while PLTR is now up more than 110% so far in 2024.
Disclaimer:
Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.