Weekly Trader's Outlook

If you read last week's blog you might recall that my forecast for this week was "Moderately Bullish", noting the encouraging technical set-up heading into this week. At the time of this writing, the S&P 500 is at fresh all-time highs and is on track to register a ~2% gain on the week. And this week's march higher in stocks occurred in the face of a U.S. government shutdown. Aside from the bullish technical set-up, I think there were several other potential drivers of this week's performance: a) seasonality turned more bullish as we exited September b) there was continued news flow regarding the AI infrastructure buildout c) the potential for performance chasing for underperforming fund managers as Q4 gets underway d) lower Treasury yields across the curve and e) optimism around the start of Q3 earnings season which is less than 2 weeks away. Regarding Q3 earnings, the FactSet EPS growth forecast for the S&P 500 is 7.9% and 9.3% for 2025 (down slightly from the prior week).

On the economic front however, we didn't get the monthly jobs report due to the government shutdown, but we did get the ADP Employment change, which showed the largest drop since 2023. We also saw some softness from this week's manufacturing and services reports, and some degradation in consumer confidence (more on this in the "Economic Data, Rates & the Fed" section below).

As the government shutdown currently stands, the Senate is currently voting on the Democratic and Republican short-term spending bills. Should the votes fail once again, the Senate will adjourn until Monday which would represent the sixth day of the shutdown.

At the time of this writing (2:40 PM ET), stocks are mixed (DJI + 323, SPX + 6, COMPX - 63) after hitting fresh records across the board earlier in the trading session. What's interesting about today's action is the midday reversal in tech stocks, primarily focused on the AI-related names. For example, PLTR is down over 7%, META is down nearly 2%, and the SOX is down 0.65% after hitting a fresh all-time high near-the open today. Whether today's intraday reversal represents some natural profit taking in the hot tech trade, or a harbinger of a larger near-term pullback remains to be seen (today's close in the Nasdaq could provide some more color). Technology/momentum stocks have enjoyed an incredible run over the past several months, so some moderate consolidation wouldn't be unusual at this juncture. But the question on my mind is: if we get a pullback in the tech trade, how deep will it go, or how long will it last before dip buyers step back in? The uptrend has been resilient and the intermediate-term technical remain bullish, but near-term there are some indications that we're overbought (more on this in the "Technical Take" section below). The other question I have is: if we get a pullback in the tech trade, will the money flow simply rotate into other areas of the market, thereby holding up overall index levels? Perhaps these questions are impossible to answer ahead of a potential tech pullback, and until then, respect the trend and the tendency for momentum to beget momentum. There's also uncertainty around the government shutdown notion regarding how long it lasts and whether markets will begin to care about it at some point. I won't have the luxury of seeing where the Nasdaq closes today, but if it closes near the lows I would read this as a bearish signal heading into next week. Regardless, I think the 14-year high RSI reading in the SOX conveys a higher probability of near-term mean reversion and therefore I believe some near-term caution on the tech trade is warranted. Therefore, my forecast for next week is "near-term cautious on tech" along with the "potential for higher volatility". What could challenge my forecast? As I referenced above, if we get a modest pullback in stocks or in the tech trade, the sell-off could be shallow and met with more of the dip buying behavior we've seen over the past several months.

• Monday (10/6): no reports
• Tuesday (10/7): Consumer Credit, Trade Balance
• Wednesday (10/8): EIA Crude Oil Inventories, MBA Mortgage Applications Index
• Thursday (10/9): Continuing Claims, EIA Natural Gas Inventories, Initial Claims, Wholesale Inventories
• Friday (10/10): Treasury Budget, University of Michigan Consumer Sentiment

• Monday (10/6): Constellation Brands Inc. (STZ), Aehr Test Systems Inc. (AEHR), Spire Global Inc. (SPIR), Brand Engagement Network Inc. (BNAI)
• Tuesday (10/7): McCormick & company Inc. (MKC), Penguin Solutions Inc. (PENG), Saratoga Investment Corp. (SAR)
• Wednesday (10/8): AZZ Inc. (AZZ), Resources Connection Inc. (RGP), Richardson Electronics Ltd. (RELL), Bassell Furniture Industries Inc. (BSET)
• Thursday (10/9): Applied Digital Corp. (APLD), Apogee Enterprises Inc. (APOG), Delta Air Lines Inc. (DAL), Helen of Troy Ltd. (HELE), Levi Strauss & Co. (LEVI), PepsiCo Inc. (PEP), Neogen Corp. (NEOG), Tilray Brands Inc. (TLRY), VinFast Auto Ltd. (VFS)
• Friday (10/10): no reports

This week's release of economic data was restricted due to the government shutdown. However, we did get the ADP report, and the numbers weren't great. Not only did the reported 32K loss represent the largest decline since 2023, but august was revised from an initial gain of 54K to -3K. Bond yields dropped and Fed rate cut probabilities ticked up following the report, and equities moved higher, translating the softer economic data as justification for more rate cuts in essence. Elsewhere, job openings were steady, but the Challenger report conveyed stagnation of hiring in the labor market. Here's the breakdown from this week's reports:

• ADP Employment Change: Declined 32K versus expectations for a 54K increase, which represents the lowest figure since March of 2023.
• JOLTS – Job Openings: Were 7.227M in August, above the 7.20M expected and up from 7.208M in July.
• ISM Manufacturing Index: Came in at 49.1%, slightly above the 49.0% expected. This represents the seventh straight month of contraction (any figure below 50.0 represents contraction, above 50.0 expansion).
• S&P Global U.S. Manufacturing PMI: Pulled back slightly to 52.0 in September from the 3-year high of 53.0 in August.
• S&P Global U.S. Services PMI: Softened to 54.2 from 54.5 in the prior month.
• ISM Services: Declined to 50.0% in September from 52.0% in August. The Prices Index increased 0.2% from August to 69.4%.
• US Challenger Job Cuts: U.S.-based employers announced 54,064 job cuts in September, down from 85,979 in August. September marked the lowest year-to-date hiring plans since 2009. For the third quarter, planned layoffs totaled 202,119, which represents the highest quarterly total since 2020.
• Pending Home Sales: 4.0% vs. 0.5% est.
• Chicago PMI: 40.6 vs. 42.5 est.
• Consumer Confidence: Declined by 3.6 points in September to 94.2, below the 97.0 economists had expected. This represents the lowest reading since April. Consumers' 12-month inflation expectations eased to 5.8% from 6.1% in the prior month.
• The Atlanta Fed's GDPNow "nowcast" for Q3 GDP was revised down slightly to +3.8% on October 1st from +3.9% on September 26th.

Treasury yields are up down the week, which was likely driven by both the government shutdown and the soft ADP report. There was a little steepening of the yield curve if you compare 2-year to 30-year yields. Compared to last Friday, 2-year Treasury yields are down ~8 basis points (3.566% vs. 3.647%), as are 10-year yields (4.106% vs. 4.187%) while 30-year yields are lower by ~5 basis points (4.713% vs. 4.765%).

Expectations around potential rate cuts from the Fed in 2025 moved higher this week, primarily driven by the weak ADP report. Per Bloomberg, markets are still expecting two more 25-basis point cut this year, but the October probability moved up to 97% from 89% and the December probability jumped a more notable 13% (from 73% to 86%). For reference, the Fed's dot plot pencils in two 25 basis point cuts in 2025 and one more 25 basis point cut in 2026.

Last week I noted the resiliency of the uptrend in the S&P 500 (SPX), as evidenced by the multiple bounces off the 20-day Simple Moving Average, and the fact that the SPX has only closed below that indicator three times since April. The uptrend maintained its bullish ways this week by once again bouncing off the 20-day SMA and hitting a fresh all-time high today. Therefore, the intermediate-term trend remains bullish, but near-term we could be considered a little stretched on the upside as evidenced by today's 72 reading on the Relative Strength Index (RSI). While the RSI is not a timing indicator (meaning it doesn't tell you when a pullback is imminent based on a specific level), if you look at the historical relationship between the RSI and the SPX, you can see that the index does not spend a lot of time above 70 before encountering some degree of consolidation before climbing to higher levels. Additionally, the RSI on the SPX hit 75 at the prior high (back on September 22nd), and if the index pulls back next week this could generate a negative divergence (bearish signal) on the RSI, but it's too early to make that presumption. For reference, a negative divergence in the RSI is when the underlying (the SPX in this example) hits a new price high with a correspondingly lower RSI reading than the prior price high. Therefore, I think some near-term caution is warranted here from a trading perspective.

Technical translation: intermediate-term bullish, short-term cautious

The SOX is on track to log a 5.25% gain this week and the index is trading at a fresh all-time high today, buoyed by optimism over the need for chips due to the AI infrastructure buildout. However, it should be noted that the persistent buying has pushed the Relative Strength Index (RSI) to 83, a level not seen since January of 2011. Back then, the RSI hit 87, the index subsequently pulled back 5% over the next couple days, consolidated and then went on to make new highs three weeks later (see second chart below). You may have heard the axiom, "history doesn't always repeat, but it often rhymes", and some near-term caution is warranted here given the overbought status of this index.

Technical translation: near-term cautious

According to data tracking firm RWA.xyz, net inflows to stablecoins during the third quarter jumped to $45.6B from $10.8B in the second quarter, representing a 324% increase. Tether's USDT led the way with $19.4B, followed by Circle's USDC at $12.3B and Ethena's synthetic stablecoin USDe at $9B. It probably isn't a surprise to see increased inflows into stablecoins given the news flow around the space and the recently passed GENIUS Act, but it will be important to track these flows in coming quarters. The majority of stablecoins are hosted on the Ethereum network and according to The Block, Ethereum-based stablecoin adoption logged 750,000 unique weekly users this summer, representing a fresh all-time high.

The Bloomberg chart below shows the current % of members within the S&P 500 (SPX), Nasdaq Composite (CCMP) & Russell 2000 (RTY) that are trading above their respective 200-day Simple Moving Averages (SMA). In short, stocks had an up week, but market breadth only expanded in the S&P 500. On a week-over-week basis, the SPX (white line) breadth moved up to 66.80% from 62.40%, the CCMP (blue line) is essentially unchanged at 53.54% vs. 53.08%, while the RTY (red line) eased to 60.88% from 61.63%.