Weekly Trader's Outlook

If you read last week's blog you might recall that my forecast for this week was "slightly bullish," noting the constructive technical setup in the DJI/NDX, while acknowledging that a move higher in yields could challenge my outlook. Well, my forecast turned out to be wrong as the SPX is on track (at midday) to be down nearly 2% and the NDX is on track to be down ~2.5% on the week. As cautioned though, rising bond yields were the culprit as yields on the two-year are at five-month highs and 10-year yields are at 14-month highs today. The reason behind this week's push higher in yields is due to both strong economic data and warmer inflationary data points (see "Economic Data, Rates & the Fed" section below). The stronger economic data appears to be causing a bit of a reset of the prior bullish thesis from investors, which included a strong economy, an accommodative Federal Reserve and moderating inflation. Back at December's Federal Open Market Committee (FOMC) meeting the Fed telegraphed a "not so fast" tone regarding potential rate cuts and the recent stronger economic data is only emphasizing that notion. The good news for the bulls is that the economy is strong, which could help corporate earnings growth and the U.S. economy has demonstrated over the past couple of years that it can hold up in a higher rate environment. The concern for markets is the velocity of the push higher in yields (10-year yields up 50 basis points in a month) and whether they continue to move higher in the coming months. Remember that rising bond yields have several negative implications for stocks: higher borrowing costs, a tighter financial environment for economic growth, less attractive equity risk premium, a more compelling asset alternative to stocks and bad breadth (see "Market Breadth" section below).

Elsewhere, while Nvidia CEO Jensen Huang delivered an upbeat keynote speech at CES regarding the future of AI, we saw a "sell on the news" reaction in chip stocks the following day. Additionally, Huang poured some cold water on the quantum computing trade by suggesting that practical commercial application was likely two decades away. Quantum computing stocks were nearly halved the following day and the sell-off, coupled with a ~10% drop in the price of Bitcoin this week, resulted in a considerable hit to the momentum/spec trade that we've seen over the past couple of months.

At the time of this writing (1:15 p.m. ET), all the major indices are trading lower, but off the lows of the session (DJI - 583, SPX - 77, COMP - 277). From a bullish perspective, we are near-term oversold, there has been some evidence of bond buyers stepping in at these elevated yields today, and the SPX is currently back above its 100-day SMA after dropping below it earlier in the session. If yields on the 10-year can move back below ~4.70%, which is the high from last April, I believe this would be enough of a catalyst to get a bounce in stocks next week. However, we don't know if that will occur, and we will be getting the monthly CPI/PPI data next Tuesday/Wednesday which will likely dictate the near-term trajectory of yields. Market will also be closely monitoring the Q4 earnings season unofficial kickoff with the big banks starting next Wednesday. If yields are going to be moving higher because of stronger economic data and warmer inflationary data, then the bulls will want to see Q4 earnings back up their position. I'm finding it difficult to ascertain which way stocks will move next week because I believe that much of the direction depends on the inflation data and subsequent response in bond yields. The technical setup is also difficult to pinpoint since we have the SPX apparently finding support at the 100-day SMA (bullish), but the NDX losing support at the 50-day SMA and the DJI losing support at the 100-day SMA today. Therefore, I'm going to go with a forecast for next that includes "elevated volatility" and "slightly bearish," since I think the odds that we close lower next Friday vs. today is greater than 50%. What could challenge my outlook? If the inflation data comes out in line or slightly cool and yields move lower it will likely be a bullish week for stocks.

Other Potential Market-Moving Catalysts:

Economic:

• Monday (1/13): Treasury Budget
• Tuesday (1/14): Producer Price Index (PPI)
• Wednesday (1/15): Consumer Price Index (CPI), EIA Crude Oil Inventories, Empire State Manufacturing, MBA Mortgage Applications Index
• Thursday (1/16): Business Inventories, Continuing Claims, EIA Natural Gas Inventories, Export Prices, Import Prices, Initial Claims, NAHB Housing Market Index, Philadelphia Fed Index, Retail Sales
• Friday (1/17): Building Permits, Capacity Utilization, Housing Starts, Industrial Production, Net Long-Term TIC Flows

Earnings:

• Monday (1/13): KB Home (KBH)
• Tuesday (1/14): Applied Digital Corp. (APLD), Calavo Growers Inc. (CVGW)
• Wednesday (1/15): JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), Goldman Sachs Group (GS), BlackRock Inc. (BLK), Citigroup (C), Bank of New York Mellon Corp. (BK), Synovus Financial Corp. (SNV), H.B. Fuller Company (FUL)
• Thursday (1/16): United Health Group (UNH), Bank of America Corp. (BAC), Morgan Stanley (MS), PNC Financial Services Group (PNC), US Bancorp (USB), M&T Bank Corp. (MTB), J.B. Hunt Transport Services (JBHT), Bank OZK (OZK), Taiwan Semiconductor Manufacturing (TSM)
• Friday (1/17): Truist Financial Corp. (TFC), Schlumberger NV (SLB), Fastenal Co. (FAST), State Street Corp. (STT), Huntington Bancshares Inc. (HBAN), Regions Financial Corp. (RF), Citizens Financial Group Inc. (CFG), Webster Financial Corp. (WBS)

There was a heavy dose of economic data for markets to digest this week. In short, the data was stronger than expected, especially on the employment front, with evidence of inflation ticking back higher, and longer-term bond yields responding accordingly. Here's the breakdown from this week's reports:

• Nonfarm Payrolls: 256K new jobs were created in December, well above the +165K expected and above the +212K in the prior month.
• Unemployment Rate: fell to 4.1% from 4.2% in the prior month and below the 4.2% expected.
• Average Hourly Earnings: Rose 0.3% in December, in-line with expectations and below the +0.4% in the prior month. On a year-over-year basis wages rose 3.9% a tick down from the +4.0% seen in November.
• University of Michigan Consumer Sentiment: 73.2, below the 73.8 expected and lower than the 74.0 reported in the prior month. Perhaps more importantly for stocks, the one-year inflation expectation rose to 3.3% from 2.8% in December and five to 10-year inflation expectations rose to 3.3% from 3.0% in the prior month. That +3.3% figure on five to 10-year expectations represents the highest level since 2008.
• ISM Services: 54.1%, above the 53.5% expected and representing a three-month high. Notably, the Prices Paid Index hit 64.0 which represents the highest reading since early 2023.
• FOMC Minutes: Fed seen "at or near the point" appropriate to "slow the pace of policy easing".
• JOLTs- Job Openings: Rose to a six-month high of 8.098M and above the 7.7M economists had expected.
• Initial Jobless Claims: Dropped to nearly a one-year low low of 201K, down 10K from the prior week, and below the 216K expected. Continuing Claims increased 33K to 1.867M from 1.834M last week.
• The Atlanta Fed's GDPNow "nowcast" for Q4 was revised a tick higher to 2.7% yesterday from 2.6% on January 2nd.

U.S. Treasury yields continued to push higher recently with the two-year hitting a five-month high this morning and 10-year yields hitting the highest levels since November of 2023 today. Compared to last Friday, two-year Treasury yields are up ~8 basis points to 4.367% from 4.283% and 10-year yields moved higher by ~15 basis points to the current 4.745% from 4.596%. On a positive note, we did have a 30-year Treasury auction on Wednesday which was well received, and 10-year yields appears to be finding some buyers during today's session (TNX high of the day is 4.79% vs. current level of 4.745%).

Expectations around future potential rate cuts from the Fed diminished some this week, primarily driven by this morning's strong jobs data. Currently, Bloomberg probabilities are suggesting essentially one 25 basis point cut in 2025. While this isn't a huge shift from last Friday, the first FOMC meeting that has a theoretical 100% probability of a 25-basis-point cut moved from June to September on a week-over-week basis. 

Up until Wednesday's close the S&P 500 (SXP) was holding its ground above the post-election support "line in the sand" at around 5,870. Unfortunately for the bulls, not only is the SPX below that support near-term level but it's also currently below intermediate support at the 100-day Simple Moving Average (where the index bounced back in last April and September). If the index can close above the 100-day SMA today (currently 5,820), that would be an incrementally bullish development, but otherwise my technical take is currently bearish. Near-term technical translation: bearish

The Nasdaq 100 index (NDX) also appears to be taking a bearish turn today. The NDX is currently down over 2.5% on the week to a fresh five-week low and below near-term support at the 50-day Simple Moving Average. The NDX hasn't been below its 50-day SMA since early September, so this is an early signal that bullish momentum may be shifting. Near-term technical translation: bearish

The Bloomberg chart below shows the current percentage of members within the S&P 500 (SPX), Nasdaq Composite (CCMP) and Russell 2000 (RTY) that are trading above their respective 200-day Simple Moving Averages (SMA). Stocks are on track for a down week and while we didn't see much change in the SPX/CCMP, the RTY fell to the lowest levels since August. On a week-over-week basis, the SPX (white line) breadth is currently 55.82% versus 55.51%, the CCMP (blue line) was essentially flat at 45.82% versus 46.58%, while the the RTY (red line) dropped to 49.90% from 52.21%.

Market breadth attempts to capture individual stock participation within an overall index, which can help convey underlying strength or weakness of a move or trend. Typically, broader participation suggests healthy investor sentiment and supportive technicals. There are many data points to help convey market breadth, such as advancing vs. declining issues, percentage of stocks within an index that are above or below a longer-term moving average or new highs vs. new lows.

This Week's Notable 52-week Highs (31 today): Alaska Air Group Inc. (ALK + $1.34 to $67.63), American Airlines Group (AAL + $0.53 to $18.13), Elbit Systems Ltd. (ESLT + $6.46 to $280.52), EQT Corp. (EQT + $0.67 to $49.67), TechnipFMC PLC (FTI - $0.55 to $32.00), United Airlines Holdings Inc. (UAL + $4.39 to $108.11)

This Week's Notable 52-week Lows (169 today): Adobe Systems Inc. (ADBE - $10.51 to $409.07), Advanced Micro Devices Inc. (AMD - $7.05 to $114.79), Constellation Brands Inc. (STZ - $21.91 to $197.37), General Mills Inc. (GIS - $0.22 to $60.15), Harley-Davidson Inc. (HOG - $0.71 to $28.18), Polaris Inc. (PII - $2.47 to $52.94)