This program is for macro market quantitative analysis and is provided for informational and educational purposes only and does not constitute investment advice, an offer to buy or sell any security, or a solicitation. The direction of the ETFs mentioned is output from a system quant model and is not personalized investment advice, nor does it take into account individual risk tolerance or financial condition. Investments involve risks, and any decisions should be made after consulting with a licensed investment advisor.

Acknowledge a fact: the market was broadly down last night. SPY fell by 2.58%, and QQQ dropped by 4.80%. This is a typical broad-market sell-off. In plain terms, it means that it wasn't just one sector that had issues; rather, many parts of the market were sold off together.

But today, the system wants to focus on more than just how much it has fallen. Rather, it is about the three main underlying themes behind the fall. The first is that strong employment is making rate cuts seem further away. The second is that tensions in the Middle East have not yet subsided. The third is that the AI semiconductor story is far from dead, but the market has doused it with cold water in the short term. To put it plainly, the market isn't without stories now; good stories still need to clear the hurdle of interest rates.

Compared to yesterday, the three biggest changes are

First, the attitude of the broader market has become more cautious. VOO shifted from neutral to slightly negative, and the conviction has increased. In plain terms, the system is now more concerned about the impact of 'high interest rates depressing valuations.' Valuation refers to how much people are willing to pay for stocks. When interest rates are high, people typically do not want to pay too high a price.

Why did this happen? Because the non-farm payroll data on June 5 was very strong. The figures were +172k, while expectations were only 85k. This indicates that the U.S. economy is not yet soft. Consequently, the Fed is less likely to cut rates. Without rate cuts, borrowing costs remain high. With money being more expensive, especially for large-cap valuations in the stock market, it becomes even harder for them to rise.

The second change is that the direction of overseas bonds has flipped. BNDX shifted from slightly negative to slightly positive. In plain terms, the system now perceives international bonds as having a bit of a safe-haven quality. The reason isn't an economic turnaround but rather an increase in geopolitical risks such as the US-Iran conflict and disruptions in shipping, which are prompting some funds to seek more stable assets first.

However, it is important to clarify that this is not a particularly strong confirmation signal. There are counteracting factors on the other side, such as higher interest rates and a stronger US dollar, which could suppress the performance of overseas bonds. Therefore, the system is not particularly bullish but rather cautiously positive, requiring further observation.

The third change is that the semiconductor chain has cooled down. EWT has returned to neutral from slightly positive. DTCR has also returned to neutral from a slightly positive stance. SMH and SOXQ, which entered the analysis recently, are both neutral as well. In plain terms, it’s not that the AI story is over, but rather that the market is currently not buying into it now.

Why? Because the short-term retracement was too severe. For instance, SOXX fell by 10.44% on the previous trading day, and SMH dropped by 9.22%. It's important to note that the system does not reverse its logic simply because prices have fallen. According to the system's main line of reasoning, the path for AI computing capital expenditure remains intact. Capital expenditure refers to companies spending money to expand their equipment. You can think of it as companies expanding their facilities, purchasing servers, and bolstering computing power. However, the market disagrees in the short term due to macroeconomic pressures that are currently suppressing this trend.

Storyline One: Employment Too Strong, Further Rate Cuts Are Less Likely, Putting Pressure on Stocks

Let's start with the hardest of today. The timing is clear: on June 5, the US non-farm payroll data was released. New employment added was +172k, while market expectations were for 85k. This is called 'beat expectations'. In plain terms, it means the actual results were significantly better than what everyone had guessed beforehand.

Why is the market tense despite strong employment? Many find this puzzling. More jobs should be a good thing, right? Indeed, it's good for the economy, but it's not good for the expectation of an imminent rate cut. Because strong employment indicates that the economy is not weak. If the economy is not weak, the Fed has no need to rush to lower interest rates. The Fed maintaining a tight stance means keeping interest rates at higher levels in plain terms.

This transmission chain is crucial to understand. Strong employment indicates robust demand. Robust demand makes it difficult for inflationary pressures to ease. Inflation not easing means the Fed is less likely to cut rates. Unwillingness to cut rates leads to higher borrowing costs. Higher borrowing costs put more pressure on small businesses, real estate, and high-valued growth stocks. For example, if before loans cost 3% annually to open a store, now it’s still 5% or even higher, many expansion plans would have to be scaled back.

Which ETFs are the system more cautious about? First, VOO. The system has a negative outlook on VOO with significant caution. VOO can be seen as a basket of the US large-cap equity market. It is not that the fundamentals are poor, but rather that high interest rates are pressuring overall valuations.

Second, IWM. The system is quite bearish on IWM. IWM represents US small-cap stocks. Small-caps are generally more sensitive to high interest rates because they rely more heavily on external funding and have thinner financial buffers compared to large companies. Large companies can be seen as having thicker cash reserves, while small companies are more like those still aggressively expanding. When money gets expensive, small companies feel it first. Moreover, the tape also confirmed this judgment. The tape refers to the actual price action in the market. In plain terms, it means how the market behaved yesterday. IWM has recently remained relatively weaker compared to SPY, consistent with the system's main trend.

Third, TIP. The system is quite bearish on TIP. TIP represents inflation-protected bonds. In plain terms, it was designed to hedge against inflation. However, if real interest rates remain high, TIP will also be under pressure. Real interest rates can be understood as 'the true interest rate after deducting inflation.' The higher this interest rate is, the worse many assets will perform. Even though TIP only fell by 0.48% in the previous trading session and looked not so bad on a short-term basis, the system still adheres to its original judgment because the primary reason is not just the daily price movement but rather the macro trend of 'harder for interest rates to cut.'

[未翻译/untranslated] 第四，KBE 和 KRE。 这两个都是银行相关 ETF。 KBE 偏大银行， KRE 偏区域银行。 区域银行就是地方性银行。 KBE 新进判断是偏负面， 但把握一般。 因为原先有人会想， 如果未来转鸽，银行息差会受压。 转鸽就是立场变温和， 白话讲，就是更愿意降息。 但现在转鸽概率下降， 原先那条负面驱动在变弱。

KRE remains on the sidelines for now. Why did KRE rise by 4.30% last night? This is because the market is trading on something else in the short term, such as 'high interest rates can support bank spreads.' Bank spreads are the difference between what banks earn from lending and what they pay out in deposits. In simpler terms, it's the difference between the interest received by the bank and the interest paid out. However, our analysis suggests that this line is still too early and requires more price and option confirmation. Option confirmation, in plain terms, means whether the market is willing to spend more money betting on a particular direction. Therefore, KRE will remain on the sidelines for now.

Following this line of thought, AGG is also neutral. AGG represents US aggregate bonds. The system does not turn optimistic immediately for a simple reason: bonds are more likely to benefit broadly only with a clearer shift towards rate cuts.

The U.S. economy is not soft enough, so the market fears not recession but 'higher rates for longer'.

Storyline Two: Tensions in the Middle East Have Not Subsided, Demand for Safe Havens Remains, but Markets Are Tangled

The second main thread is the continued tension in U.S.-Iran-related situations. The key triggers include the ongoing in the Strait of Hormuz, the downing of two Iranian drones by the U.S. military, and reports of suspected mines, navigation warnings, and maritime interceptions. This period mainly focuses on May 30 to June 3.

Why does this affect ETFs? Because when geopolitical tensions escalate, the market's first reaction is typically not to assess earnings, but to seek safety. In plain terms, seeking safety means moving money to places where everyone is more willing to temporarily put their trust. Common safe havens include the US dollar, gold, and sometimes long-term bonds as well.

First, the US dollar. UUP is a crucial component in today's system. The system has a positive outlook on UUP and is quite confident about it. UUP can be understood as an indicator of the direction of the US dollar index. In simpler terms, it reflects whether the US dollar is strong or not. Why does geopolitical risk push up the US dollar? Because when global tensions rise, funds tend to flow back into US assets first. Additionally, with a strong non-farm payroll report, interest rates in the US are supporting the dollar as well. This creates a dual support of 'risk aversion + yield differential.' Yield differential, in plain terms, refers to the difference in interest rates between different countries. Wherever the interest rate is higher, more money tends to flow there. Moreover, the market has validated the system's judgment: UUP rose by 0.65% on the previous trading day and by 1.30% over the past five days.

Now, let's talk about gold. Here, we need to particularly remind everyone that there seems to be some divergence between IAU and GLD. IAU is positively inclined in stable high confidence scenarios, and it is confirmed as a bullish position in the main judgment. The system is quite confident about the positive outlook for IAU. Given the accumulating frequency of military frictions, historically, this situation is closer to one where 'risk aversion funds flow into gold after an escalation'.

But the question arises that on the previous trading day, IAU fell by 7.90%. This is contrary to the main system line. According to the rules, one cannot reverse a judgment just because prices are moving in the opposite direction. Therefore, it must be clearly stated that the market disagrees in the short term. The system's rationale is that evidence of geo-political tensions is still accumulating and that a single large decline does not completely negate the risk-averse logic. In plain terms, there might be short-term liquidation or profit-taking, or perhaps the strong US dollar has temporarily suppressed gold prices. However, from a 1 to 3 month perspective, the system remains biased towards support for gold.

Looking at long-term bonds, which are represented by TLT. TLT stands for US long-term Treasury bonds. The term duration may sound intimidating to many. In plain terms, duration refers to how sensitive a bond is to changes in interest rates. The longer the bond, the more it acts like a long plank and swings more. TLT represents such long-term bonds that are very sensitive to changes in interest rates.

The system's attitude towards TLT is 'controversial'. There is a slight bias towards the positive in the short term, but it remains uncertain in the medium term. Why? Because on one hand, there is safe-haven buying due to geopolitical conflicts, and on the other hand, high US interest rates are pressing on long-term bonds. So it's like two forces pulling in opposite directions. TLT fell by 0.51% in the previous trading session, and the market has not fully shifted towards the safe-haven side in the short term either. Therefore, we cannot say that we are very optimistic about TLT; we can only say that there is some short-term confidence, but medium-term observation is still needed.

Another change is BNDX. The system has a slightly positive view on BNDX, but further observation is needed. BNDX represents international bonds, similar in logic to TLT and also benefits from risk aversion. However, it is more vulnerable to a stronger US dollar. When the US dollar strengthens, it typically puts pressure on foreign assets. Therefore, its bullish stance is not very firm; rather, it's like 'risk aversion adds points, but a strong US dollar subtracts.'

What about energy? XLE has shifted from neutral to slightly positive, but with limited conviction. This is important. Many assume that any tension in the Middle East will push oil prices higher. The system isn't this aggressive because current evidence regarding Iran and the U.S. remains conflicted and doesn’t form a one-sided narrative for oil prices. Moreover, OPEC+’s previously bearish concerns have returned to neutral, reducing some downward pressure. Additionally, the imagination of energy demand from capital expenditures on AI computing power adds a slight positive boost to XLE. However, this is still an early signal. Therefore, the system views XLE with slightly positive bias but limited conviction.

XOP and AMLP are more cautious. XOP has returned to neutral, and AMLP is also neutral. In plain terms, it's not that there are no opportunities in the energy chain, but rather that the evidence isn't strong enough yet. AMLP mainly consists of pipeline and midstream assets, which require trend confirmation. Trend confirmation, in simple terms, means more than just a one or two-day rise; it's about sustained movement in the same direction.

The key takeaway from this storyline is that: risk appetite remains, but not all safe-haven assets are benefiting in unison. The dollar is stronger, gold makes sense but has been short-term hit, while long bonds are pulled back and forth by geo-political factors and high interest rates.

Plot Line Three: The AI semiconductor story is not dead, but the market has cooled it off with a sharp decline.

The third main line is technology and semiconductors, which are of greatest concern to many. To conclude, the system has not declared AI dead. However, short-term sentiment is indeed poor.

The trigger points come from two sides. One is NVIDIA at GTC, and on June 1, 2026, at COMPUTEX, around the new narrative of N1X and AI PCs. In plain terms, this means that in addition to data centers, personal computers are also being drawn into the expansion of AI computing power. Computing power refers to a machine's ability to process AI. You can think of it as electricity and engines in the world of AI.

On the other hand, the market delivered a harsh reality check. SOXX fell by 10.44% on the previous trading day, SMH dropped by 9.22%, and QQQ also declined by 4.80%. This indicates that tech stocks were not merely experiencing a minor correction but were clearly under significant pressure.

How does the system view it? First, let's look at SOXX. The system has a positive outlook on SOXX with some confidence. Why not more certainty? Although the AI capital expenditure logic still holds, there is a significant short-term price retracement, and the macro environment is working against it. In simpler terms, the macro environment refers to factors like interest rates, employment, and the dollar. When these larger background factors are not supportive, even the best industry narratives may first face valuation pressure.

SOXX's thesis and tape are in reverse. That is, the system is bullish on SOXX, but prices took a significant dive yesterday. So it must be clear that the market disagrees in the short term. The system rationale is that the line of structural enhancement in AI computing capital expenditures remains intact, not ending with a single-day plunge. It's just that the previous overheated premium has been quickly reversed. In plain terms, a premium means the extra price everyone is willing to pay initially.

Now let's look at SMH and SOXQ. Both are new entries today. The system remains on the sidelines for SMH. It also remains on the sidelines for SOXQ. Although the underlying logic still hinges on N1X driving demand on both the edge and cloud, there is a lack of additional independent confirmation. In plain terms, this means that it's not just one piece of news supporting the move; rather, price action, fund flows, and options are all aligning in the same direction. This condition is currently not met.

Regarding EWT related to Taiwan, it has also been downgraded back to neutral today. The reason is straightforward. Of course, the Taiwanese supply chain benefits from AI server and manufacturing demand. However, there has been a significant pullback over the past three days, and the defensive premium on options has risen. In plain terms, this means the market is more willing to spend money on insurance for itself. This indicates that people are not feeling particularly secure. Therefore, the system temporarily holds a neutral stance on EWT.

DTCR is similar. Previously, there was only an early bullish narrative, and now without secondary confirmation, it should be downgraded to neutral. In plain terms, secondary confirmation means additional evidence such as earnings reports, orders, or cash flows after the initial story. If none of these are present, the system will not artificially boost confidence.

However, there is one that still holds up: AIQ. The system has a positive assessment of AIQ with significant confidence. AIQ is not purely semiconductor-focused; rather, it represents a basket of assets related to AI. Compared to a single chip chain, it offers some diversification. In plain terms, diversification means not putting all your eggs in one basket. During short-term large fluctuations, such a basket may be less damaging.

Within this main thread, the easiest mistakes to make are two. The first mistake is to see the sharp declines in SOXX and SMH and conclude that the AI story is over. The system does not view it this way. The second mistake is to think that since the long-term logic still holds, short-term recovery must happen immediately. The system also does not view it this way. Currently, it seems more like the long-term story remains intact while short-term valuations and sentiment are being squeezed for bubbles. Therefore, among related ETFs, SOXX remains positively biased but requires observation, while SMH, SOXQ, EWT, and DTCR should be watched first.

Conclusion

The main theme boiled down to one sentence today: High interest rates dominate. Strong employment data pushes back any potential rate cuts, suppressing both large and small caps as well as tech valuations. Meanwhile, tensions in the Middle East keep dollar demand and safe-haven flows strong, though gold, long bonds, and energy have shown uneven performances.

Over the next 1 to 3 days, there are three things worth watching. First, Fed-related statements to see if they continue to signal that interest rates will remain higher for longer. Second, any new escalations in the Middle East, particularly regarding the Strait of Hormuz, disruptions to shipping, and reports of drones and interceptions. Third, whether the semiconductor sector can stop its decline. If it's just a price drop but followed by improvements in subsequent orders, capital expenditures, and option structures, then the AI could stabilize.

So there's no need to rush today.