Weekly Trader's Outlook

If you read last week's blog, you might recall that my colleague Jim Ferraioli had a "Cautious" outlook for stocks this week, citing elevated oil prices, yields, bearish seasonality and this week's FOMC meeting. The major U.S. indices are on track to be down anywhere between 0.5-2.0% this week as higher oil, yields and a relatively hawkish FOMC meeting weighed on Wall Street.

WTI crude prices (October futures) are on track to be up roughly 1% this week but pushed above $106 earlier this week. Perhaps more notably, average U.S. diesel prices hit a new record high today of $6.45 per gallon. Earlier today, U.S. President Donald Trump said that "hopefully" the end of the Iran war is near but strikes between Saudi Arabia and the Iran-backed Houthis in Yemen continued to escalate this week. In my view, the state of the Middle East remains an important "leading indicator" for stocks, as higher oil prices impact inflationary pressures, which impact bond yields and Fed policy, which impact the stock market.

The yield curve on U.S. Treasuries saw some flattening this week, as yields on the 2-year are up ~10 basis points from last week. The adjustment in yields was obviously impacted by this week's FOMC meeting, as committee members continued to reiterate their focus on price stability and signaled additional future rate hikes (more on this in the "Economic Data, Rates & the Fed" section below).

In AI news, yesterday OpenAI disclosed six new reports of "unexpected or concerning" behavior in artificial-intelligence models. OpenAI said on Wednesday that it was introducing a new framework for tracking, probing and disclosing AI model misalignment events. Elsewhere, a team of US-based cybersecurity researchers said that they were able to hack into OpenAI with the help of Anthropic's Claude chatbot. The "ethical hack", which was designed to expose vulnerabilities in models, suggests overall AI security concerns remain top of mind globally.

At the time of this writing (1:40 PM ET) stocks are lower across the board, but off the lows of the session (DJI - 196, SPX - 11, $COMP - 9, RUT - 21). From a near-term perspective, it is evident that there is a positive correlation between oil prices and Treasury yields (higher oil prices = higher yields) and an inverse correlation between oil prices/yields and stocks. In other words, right now stocks are off the lows of the day because oil prices have eased (WTI now down to $100.89) as has yields on the 10-year Treasury (TNX now down to 4.998 from 5.008). These relationships are why I highlighted the status of the Iran war as a leading indicator (not the only indicator) to the near-term direction of stocks. Another important factor for stocks is the status of the AI infrastructure buildout, amid apparent growing community backlash of datacenter development ("not in my backyard") and now potential longer-term safety concerns. Of course, the rate at which datacenters are built potentially impacts the earnings trajectory of those tech and industrial companies involved, which filters back into valuations and investor sentiment. This may be a high-level simplistic view, but these appear to be the levers which are currently driving price action.

Next week, the economic calendar and earnings calendars are light, so the primary drivers of price action will be, you guessed it, the trajectory of oil prices and Treasury yields. President Trump and China President Xi are schedule to meet next Thursday (September 24th) to discuss several issues which include trade, the war in Iran, critical minerals and AI progression. Technically, the Dow Jones, Russell 2000 and Equal-Weighted S&P 500 (SPXEW) are all in near-term downtrends, but the market-cap weighted S&P 500 (SPX) and Nasdaq Composite ($COMP) are holding ground above key support levels (7,600 for SPX and the 50-day SMA for $COMP). The seasonal trends lean in the bears' favor as we move into the back-half of September, which is historically the worst performing month for stocks. Taking everything into consideration, I am providing a "choppy, moderately bearish" outlook for next week. If yields on the 10-year were steadily rising above the 5.0% I would be much more concerned, but since buyers appear to be stepping in around 5.0%, which coincides with the prior high in 2023, this is a relatively bullish development in my view. What could challenge my forecast? Obviously, lower oil prices and/or lower yields would likely set stocks up for weekly gains.

• Monday (9/21): no reports
• Tuesday (9/22): no reports
• Wednesday (9/23): EIA Crude Oil Inventories, MBA Mortgage Applications Index, S&P Global U.S. Manufacturing PMI, S&P Global U.S. Services PMI
• Thursday (9/24): Continuing Claims, Current Account Balance, EIA Natural Gas Inventories, Initial Claims, New Home Sales
• US President Trump and Chinese President Xi Jinping are scheduled to meet in Washington DC
• Friday (9/25): Durable Orders, University of Michigan Consumer Sentiment

• Monday (9/21): AnaptysBio Inc. (ANAB), Ennis Inc. (EBF)
• Tuesday (9/22): AutoZone Inc. (AZO), KB Home (KBH), THOR Industries Inc. (THO), Worthington Enterprises Inc. (WOR)
• Wednesday (9/23): Cintas Corporation (CTAS), Cracker Barrel Old Country Store Inc. (CBRL), General Mills Inc. (GIS), H.B. Fuller Company (FUL), Paychex Inc. (PAYX)
• Thursday (9/24): Blackberry Ltd. (BB), Costco Wholesale Corp. (COST), Darden Restaurants Inc. (DRI), TD SYNNEX Corp. (SNX), Uranium Energy Corp. (UEC)
• Friday (9/25): no reports

There was a healthy dose of economic data this week, which was highlighted by the Federal Open Market Committee (FOMC) meeting and the monthly Retail Sales report. Regarding the FOMC meeting, as expected the Fed raised rates 25 basis points, and continued to convey that their focus is on price stability (inflation) given the firm labor market and relatively strong economy (i.e. current policy is not seen as "restrictive" to growth). Elsewhere, August Retail Sales saw a strong bounce back from July, which suggests continued resiliency in the U.S. consumer. Here's a breakdown of the reports:

• Federal Open Market Committee (FOMC) Monetary Policy Decision: For the first time since 2023 the Federal Reserve unanimously voted to raise the benchmark rate 25 basis points to a range of 3.75-4.00%. Fed Chiarman Kevin Warsh indicated that the committee wanted to move in a "timely fashion" to support a timelier return to their 2% inflation goal. Within the Summary of Economic Projections (SEP), GDP was revised slightly higher in 2026/2027, the Unemployment Rate was revised slightly lower in 2026/2027 and both headline and core PCE were revised higher by 0.1% in 2026 and 2028 (their 2% goal is projected to be reached in 2029).
• Retail Sales: Headline retail sales increased 1.2% in August, which was well above economist expectations for a 0.7% increase and the largest gain since March. July Retail Sales were also revised slightly better to a 0.5% decline from the initial -0.6% reported. Core retail sales jumped 1.4%, which was above the +0.6% consensus estimate, and the largest gain since September 2024.
• Leading Economic Indicators (LEI): -0.1% vs. 0.1% est.
• Building Permits: 1.394M vs. 1.390M est.
• Housing Starts: 1.275M vs. 1.30M est.
• Pending Home Sales: 0.3% vs. 1.0% est.
• Philadelphia Fed Index: 37.8 vs. 33.0 est.
• Empire State Manufacturing: 7.6 vs. 13.0 est.
• Business Inventories: 0.8% vs. 0.3% est.
• Export Prices: 0.6 vs. -1.4% prior.
• Import Prices: 0.8% vs. 0.3% prior.
• EIA Crude Oil Inventories: -0.64M barrels.
• EIA Natural Gas Inventories: +44 bcf.
• Initial Jobless Claims: Initial applications for US jobless benefits fell 10K from last week to 196K, which was 12K below the 208K economists were expecting. Continuing Claims fell by 39K from the prior week to a seasonally adjusted 1.73M, which is the lowest level since 2024.
• The Atlanta Fed's GDPNow initial "nowcast" for Q3 GDP was revised up to 5.1% yesterday from 4.6% last week, primarily driven by an uptick in consumer spending (August retail sales).

U.S. Treasury yields aw some volatility this week, driven by this week's FOMC meeting, which resulted in some flattening of the yield curve. Compared to last Friday, 2-year Treasury yields jumped ~10 basis points (4.745% vs. 4.644%), 10-year yields increased ~4 basis points (5.016% vs. 4.975%) while 30-year yields decreased ~2 basis points (5.331% vs. 5.354%).

Market expectations around potential rate hikes from the Federal Reserve have seen a hawkish shift over the past two weeks. Per Bloomberg, two weeks ago, markets were expecting roughly 2.5 twenty-five basis point hikes from the Fed through the end of 2027, and currently there the expectation is for three more twenty-five basis point hikes, even after the 25 bp rate hike on Wednesday. On a near-term basis, markets are seeing a 57% probability of a Fed rate hike at the October FOMC and a theoretical 100% probability of a rate hike at the December FOMC meeting. One more rate hike this year roughly matches the message from the Fed's dot plot.

The S&P 500 index (SPX) is on track to be down slightly this week, but the good news (for the bulls) is that the index is on track to close above a key support level around 7,600. This roughly coincides with the 50-day Simple Moving Average (SMA) and the prior resistance level from June & July (the white dotted line in the chart below). Some technical traders might use a key near-term support level as such – if the underlying is above support, remain bullish, if it drops below support, shift to a more cautious stance. Having said that, generally technicians like to see a stronger response or "bounce" when the underlying hits support, and the SPX has been meandering on either side of this support level all week, so I believe more time (more daily candles) are required in order to make a clearer assessment.

Near-term technical translation: neutral

The Russell 2000 Index (RUT) is on track to be down roughly 1.8% on the week, which puts the index as the second worst performing major this week (the Dow is on track to be down 2.0%). Rising interest rates are likely a factor for the relative underperformance as smaller companies tend to rely more heavily on debt to fund operations. The RUT experienced a "bearish cross" in the MACD indicator back on August 20th (see chart below) and has continued to register a series of lower highs/lower lows since then. In other words, the RUT is in a downtrend, and the near-term technicals outlook is bearish. For the interested bulls, some technicians might look for a bullish reversal pattern on the charts (such as a hammer, bullish engulfing candle, morning star, etc.) for indications that the downtrend might be reversing. Of course, technical analysis is an art not a science, and past performance does not guarantee future results.

Near-term technical translation: bearish

The Bitwise 10 Large Crypto Index is up 2% since last Friday, with bitcoin up 4% and ether up 1% at the time of writing. Earlier in the week, the CLARITY Act failed to advance in the Senate, and the FOMC raised the policy rate by 25 basis points. As a result, investors should consider how different scenarios could impact the crypto market.

Absent a narrative, key debate, or fundamental catalyst, equities will typically trade based on investors' perceptions of broader macroeconomic data. Crypto is no different. Absent a narrative, macro may take more of a front seat, especially with the Federal Reserve potentially beginning a new rate-hike cycle. The key economic debate may be whether this is a modest adjustment or the start of a sustained hiking cycle aimed at bringing down inflation. Understanding how that can impact crypto markets provides mixed results. Historically, bitcoin has performed well throughout a rate-hike cycle, though there is limited history, and past performance is no guarantee of future success. The difference emerges when the Fed begins to cut rates. If bitcoin was already at a low, it appears to have rallied amid easing monetary conditions, whereas its most recent bear market began while the Fed was already cutting rates. That said, this is likely to oversimplify these events by only focusing on central bank policy rates and bitcoin's price. That said, crypto tends to behave as a risk asset and widening credit spreads have historically been negative for prices. If the Fed truly seeks to stamp out inflation and investors shift to a risk-off mindset, crypto could be impacted along with other risk assets.

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, market breadth has "rolled over" in the month of September, which is generally not a healthy sign for the major indices. This suggests less participation among index members and relative outperformance by large and mega-cap stocks. Compared to last week, the SPX (white line) breadth is down to 53.60% from 59.60%, the CCMP (blue line) pulled back to 42.54% from 44.11%, and the RUT (red line) has dropped to 54.07% from 57.42%.