Three massive catalysts just landed inside a small timeframe this week.
We’re in a heavy-hitting market, with volatile breaking news that drops every few days.
And as a result, there are great trade setups.
Strap in. This is quite the rollercoaster…
Before these three catalysts dropped, the market delivered one of its ugliest sessions of the summer.
Tech and AI leaders extended a historic beatdown amid a high-tension earnings season, and nobody knew what the first-time Fed chair would do with interest rates.
By Wednesday afternoon, you could cut the tension with a knife.
What happened over the next 24 hours confirmed everything I’ve been telling traders for weeks.
The setups are sitting right in front of us.
You just have to know where to look and how to approach them…
The Fed
The Federal Reserve held its benchmark rate at 3.50% – 3.75% on Wednesday, July 29. That makes five straight meetings without a move.
The vote came in 9-3.
Beth Hammack of Cleveland, Neel Kashkari of Minneapolis, and Lorie Logan of Dallas all dissented in favor of a quarter-point hike, with inflation still parked above the Fed’s 2% target. Three officials breaking rank in the same direction is the most since September of 2016.
But Warsh didn’t flinch. “I asked for a good family fight and I got one,” he told reporters afterward.
I’ve listened to Fed chairmen for three decades: Greenspan, Bernanke, Yellen, Powell. I know what it sounds like when a chair is uncertain, and I know what it sounds like when they’ve done their homework.
Warsh has done his homework.
He was excellent in the press conference on Wednesday, July 29.
He declined to call the rate decision a “pause” and described it as a rigorous review instead. Then he gutted the post-meeting statement down to a fraction of its normal length and made clear the market will get less forward guidance from him compared to other Fed chairs.
I felt the market would be calmed by his remarks and that we’d see a bullish rally.
It took less than 24 hours to come true.
Make note of this market shift. We want to trade with the overall momentum.
A Tale Of Two Capex Numbers
Microsoft Corporation (NASDAQ: MSFT) and Meta Platforms Inc. (NASDAQ: META) both reported earnings on Wednesday after the close.
Wall Street asked a simple question: what is all this AI spending actually buying us?
MSFT and META gave two completely different answers.
Microsoft posted $90 billion in revenue for the June quarter, up 18% year over year. Adjusted earnings landed at $4.74 per share, up 30%. Azure grew 43% on a constant currency basis against consensus near 40%, pushing the cloud unit past $100 billion in annual revenue for the first time.
And the number that mattered most: Microsoft held its capital spending outlook steady.
The stock ripped more than 15% on Thursday. It was its best single session since 2008.
Now look at Meta…
Revenue came in at $60.8 billion, up 28% and a beat. Ad impressions climbed 14% and the average price per ad rose 12%.
The top line was fine. The bottom line was not.
EPS printed $6.18 against roughly $7.15 expected, down 14% from a year ago, dragged lower by about $3.6 billion in one-time legal and severance charges.
Then came the cash flow.
Meta generated $31.86 billion in operating cash flow and spent $31.08 billion of it on capital expenditures. Free cash flow collapsed to $784 million. A year ago that number was $8.5 billion.
To add more fuel to the fire, management raised full-year capex guidance again, to a range of $130 billion – $145 billion from $125 billion – $145 billion.
The stock dropped roughly 9% on the news.
Microsoft showed Wall Street a return. Meta posted an invoice.
The crowd has stopped paying up for AI spending on faith alone, and it’s rewarding the companies that can point to revenue on the other side of the check.
How To Trade In This Market
Wednesday morning I sent the same message to every trader…
The volatility in this market is a perfect storm.
Here’s what you should not do:
- Panic sell names that are already beaten down in a terrible way. These mini crashes can reverse very hard, so don’t give up hope.
- Add money to bad trades in the morning, before the Fed.
- Give up the fight.
- Go all in.
Here’s what you should do:
- Trust the process.
- Take some action in the last hour of the day.
- Be patient.
- Stay optimistic.
On Thursday, the market rallied. Just like I thought it would. But we’re not out of the woods yet…
Volume is still relatively thin in late July. The big money doesn’t come back until the fall.
Keep your size small. Mark your levels, wait for the setups to come to you, and let the volatility do the work.
The market has fresh news to digest this week. Pay attention to the biggest moves.
Stay Street Smart,
Jeff Zananiri
*Past performance does not indicate future results, Not typical.
