Markets moved lower this week as the speculative AI rally stalled out. As a result, technical warning flags will be critical to watch next week for signs of where this volatile market may be headed.
MACROECONOMIC UPDATE
- The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) rose 1.3 percentage points to 54% in May, while the ISM Services PMI ticked up from 53.6% to 54.5%, with both remaining in expansion territory (>50%). However, the Prices Indexes for both Manufacturing and Services remained significantly elevated, and respondents’ comments highlighted the extreme price pressures facing businesses across industries.
- The Jobs Report for May showed a stronger than expected labor market as the unemployment rate remained steady at 4.3% and 172 thousand new jobs were added.
- Stronger employment figures in conjunction with rising prices move the Fed further away from rate cuts in the near term and increase the probability of a rate hike later this year.
TECHNICAL UPDATE
- Bearish Distribution in the InvesTech Negative Leadership Composite (NLC) moved back to -2.2 as market leadership deteriorated later in the week. This will be a key indicator to watch in the coming week, and if leadership breaks down further it would signal that danger is increasing.
- The Artificial Intelligence Index fell -7% in just the last 3 days as speculative attitudes rapidly cooled. A continued fall in this Index back toward recent lows would indicate that investor enthusiasm for the AI hype is running out.
- In another sign of fizzling speculation, Bitcoin fell to a new post-peak low today. It now sits -51% off its all-time high. See our latest Market Insight for more on what Bitcoin can tell us about the broader market.
INVESTECH MODEL FUND PORTFOLIO
There are no changes to the Model Fund Portfolio this week, which is comprised of 58% long positions, 5% in an inverse index ETF, 5% in an intermediate Treasury ETF, and 32% cash held in short-term Treasurys or a money market fund. This results in 53% net equity exposure.