Update from yesterday: We closed Monday with the score at 5.08 (Short 20%) and markets at fresh all-time highs. I wrote "someone's about to be very wrong." Tuesday gave us more of the same—except the divergence just got even more extreme.
Markets didn't just hold the line. They pushed higher again:
- Dow Jones: Another new record close at 47,544.59 (+0.7%)
- S&P 500: Fresh all-time high at 6,903 (+0.4%)
- Nasdaq: Surged +1.9% to 23,637.46, led by Nvidia and AI chips
The economic score? Still 5.08. Unchanged from yesterday. Still in the Short 20% zone (5.05-5.14 range).
But here's where it gets interesting: QQQ closed at $632.92, comfortably above its 50-day EMA of $596.01. When price action is above the 70 ema and the score suggests being defensive, our backtesting shows staying long beats going short.
Final Recommendation: 100% QQQ (EMA Override Active)
The score warns caution. The trend says stay invested. Tomorrow at 2 PM ET, the Fed announces its rate decision—and we'll find out who was right.
🧮 Score vs. Trend: Why the EMA Override Matters
Let's break down the conflict:
- Economic Score: 5.08 (Short 20% range: 5.05-5.14)
- QQQ Price: $632.92
- 50-day EMA: $596.01
- Distance Above EMA: +6.2%
The score is saying: "Economic fundamentals are deteriorating. Be defensive. Hold cash."
The trend is saying: "Price is in a clear uptrend. Momentum is bullish. Stay long."
Who wins? In our backtesting, when QQQ trades above its 70 ema during periods where the score suggests defensive positioning (scores below 5.15), staying 100% long has historically outperformed going short or holding cash. Why? Because strong trends often persist longer than fundamentals suggest they should.
This doesn't mean the score is wrong. It means the market can stay irrational (or momentum-driven) longer than the fundamentals deteriorate. The EMA filter keeps you invested during those periods—avoiding costly whipsaws.
Current Position: 100% QQQ (overriding the Short 20% signal)
Watch for price breaking below $596. If that happens, the EMA override ends and we'd follow the score's defensive signal.
📈 Today's Action: Nvidia Leads Tech to New Highs
Tuesday's session was all about tech, specifically AI semiconductors:
- Nvidia: The clear leader, driving Nasdaq's 1.9% surge
- VIX (fear gauge): Dropped -3.5% to 15.79 (complacency rising)
- Advancers vs Decliners: NYSE 1.74-to-1 ratio, Nasdaq 1.21-to-1 (broad rally)
This wasn't a narrow rally—it was broad-based buying, with tech leading the charge. The enthusiasm around AI continues to drive markets higher, even as economic fundamentals (per our score) suggest more caution.
Key observation: VIX at 15.79 suggests very little fear in markets right now. That's fine during uptrends, but it also means there's limited hedging if something goes wrong.
🏦 Fed Meeting: The Catalyst Everyone's Waiting For
The Federal Reserve's two-day meeting started today. The decision comes tomorrow (Wednesday) at 2:00 PM ET, followed by Chair Powell's press conference at 2:30 PM ET.
What's Expected:
- Rate Cut: Nearly 100% probability of a 25 basis point cut (4.00%-4.25% → 3.75%-4.00%)
- Powell's Message: Likely dovish—emphasizing labor market concerns over inflation
- Future Path: Guidance on further rate cuts (will they keep cutting or pause?)
- QT Discussion: Possible debate on ending quantitative tightening (reducing balance sheet runoff)
Markets are pricing this in as bullish: rate cuts = cheaper money = stocks go up. Simple, right?
Not quite. Here's the risk: if Powell cuts rates while markets are at all-time highs and the score is warning of economic deterioration, it could mean the Fed sees weakness that markets are ignoring. Rate cuts in the middle of a rapidly cooling economy aren't lifelines—they're confirmations that things are worse than bulls want to admit.
Tomorrow at 2 PM ET, we'll find out if the market's optimism or the score's caution was justified.
🎯 My Take: Trend Wins For Now, But Tomorrow Is Key
Let's be clear: the trend is undeniably bullish right now.
All three major indices hit new all-time highs today. QQQ is 6.2% above its 50 EMA. Nvidia is ripping. VIX is asleep at 15.79. The Fed is about to cut rates. What's not to love?
But the score at 5.08 isn't screaming "crash"—it's whispering "caution." It's saying the economic data underneath this rally is deteriorating, not improving. And that creates a setup where markets are vulnerable to a surprise.
The EMA override keeps us long because fighting a strong trend is expensive. Backtesting shows that when price is above the 70 EMA, staying invested beats going defensive—even when fundamentals weaken. Trends persist. Momentum matters.
But here's the thing: tomorrow matters. The Fed announces at 2 PM ET. If Powell's message or the statement reveals something markets don't like—slower growth, persistent inflation, no more rate cuts—this rally could crack fast. And with VIX at 15.79, there's very little hedging in place.
For now: Stay 100% QQQ (EMA override). Watch for price breaking below $596 (the 50 EMA). If that happens, flip defensive immediately.
💡 Bottom Line: The Divergence Intensifies
Yesterday I wrote: "Someone's about to be very wrong." Today, the divergence got even wider.
Markets: All-time highs. Nvidia soaring. VIX asleep. Rate cut coming.
Score: Frozen at 5.08. Still warning caution. Still in defensive territory.
The EMA override keeps us long because the trend is strong. But the score's warning isn't noise—it's a signal that fundamentals are weakening beneath this euphoria.
Tomorrow at 2 PM ET, the Fed speaks. That's the moment of truth.
Strategy: Stay 100% QQQ (EMA override active). Watch QQQ's 70 ema at $596. If price breaks below, exit immediately and follow the score's Short 20% signal. Until then, ride the trend—but stay alert.
The divergence between price and fundamentals is now extreme. One of them will be proven right soon. Tomorrow might be that day.