Weekly Trader's Outlook

If you read last week's blog which Joe Mazzola wrote, you might recall that Joe was expecting additional choppy, sideways consolidation price action following last Friday's strong Nonfarm Payrolls report. We've certainly seen some choppy trading this week, driven by several economic-related catalysts (more on this in the "Economic Data, Rates & the Fed" section below), but the SPX is up a ~1.5% which was driven by cooler-than expected inflation consumer price index/producer price index (CPI/PPI) data and a corresponding 20-basis-point drop in both 10-year and two-year Treasury yields. However, not everything was dovish as the Federal Reserve's dot plots suggested only one rate cut is forecasted this year versus a prior expectation of three. NVIDIA also started trading this week on a 10-for-one split adjusted basis, but that didn't really seem to slow the recent bullish momentum as the stock is up ~8% on the week. Apple also received an "AI-boost" following presentations at the company's Worldwide Developers Conference (WWDC), which propelled the stock to fresh all-time highs. Then on Wednesday after the bell, chip-maker Broadcom added to recent tech momentum by delivering a healthy beat/raise and announced a 10-for-one stock split of its own. Money flow continues to chase mega-cap tech, driven by interest in semiconductors and other AI-related growth themes. In fact, much of the S&P 500's 14% gain in 2024 is attributable to the rally in mega-cap tech. The S&P 500 Equal Weight (SPXEW) is up just 3.2% so far this year. Yes, narrow leadership has been a common theme over the past year (or longer) but it still appears that the incremental investment dollar continues to go after what's perceived to be the "safest" place to invest: mega-cap tech. How long this type of market dominance lasts is anyone's guess, but it does speak to the longer-term theme of digitization within the economy and investor’s appetite for growth in bull markets.

At the time of this writing (3:00 p.m. ET), stocks have recovered off the lows of the session ($DJI – 75, SPX – 5, $COMPX +10) with Information Technology and Communication Services leading the top performing sectors list. I have a couple concerns heading into next week: a) stocks look overbought (especially in the technology space) from a technical perspective, and b) with the NVDA split, Apple WWDC and Federal Open Market Committee (FOMC) meeting behind us, there doesn't appear to be a near-term catalyst to push stocks higher (note: MU earnings on June 26 and personal consumption expenditures (PCE) report on June 28 appear to be next potential catalyst in my book). True, one might argue that stocks hitting fresh all-time highs is a bullish catalyst in and of itself, but the risk-reward begins to skew towards a pullback the higher you climb, so I'm sitting in the cautious camp. Therefore, my forecast for next week is "slightly bearish." I'm not bearish on stocks per se, just noting that the current near-term setup has skewed risk/reward to the downside in my view, and this is a weekly blog. What could challenge this outlook? In short, continued bullish momentum in the tech space. Generally, buying begets buying, momentum begets momentum.

Other Potential Market-Moving Catalysts:

Economic:

• Tuesday (June 18): Business Inventories, Capacity Utilization, Industrial Production, Net Long-Term TIC Flows, Retail Sales
• Wednesday (June 19): MBA Mortgage Applications Index, NAHB Housing Market Index
• Thursday (June 20): Building Permits, Continuing Claims, Current Account Balance, Housing Starts, Initial Jobless Claims
• Friday (June 21): EIA Natural Gas Inventories, Existing Home Sales, Leading Indicators

Earnings:

• Monday (June 17): Lennar Corp. (LEN), La-Z-Boy Inc. (LZB)
• Tuesday (June 18): Patterson Companies Inc. (PDCO), Cognyte Software Ltd. (CGNT), America’s CAR-MART Inc. (CRMT), KB Home (KBH)
• Wednesday (June 19): Steelcase Inc. (SCS)
• Thursday (June 20): Accenture (ACN), Kroger Co. (KR), Darden Restaurants (DRI), Jabil Inc. (JBL), Commercial Metals Co. (CMC), GMS Inc. (GMS), Winnebago Industries Inc. (WGO), Smith & Wesson Brands Inc. (SWBI)
• Friday (June 21): FactSet Research Systems Inc. (FDS), Carmax Inc. (KMX)

It was a busy week on the economic front, and I’d sum it up with the following headline: "Yields drift lower, driven by continued progress on inflation, but Fed says it's still not enough to cut rates."  Here’s a chronological summary of this week's economic data:

• Tuesday (June 11): NFIB Small Business Optimism comes in at a year-to-date high of 90.5, up from 89.7 in the prior month, but still well below the longer-term historical average of ~98.
• Wednesday (June 12): 
  o    CPI Headline 0.0%, below +0.1% expected; CPI year-over-year (YoY) +3.3%, below +3.4% expected; Core CPI +0.2%, below +0.3% expected; Core CPI YoY +3.4%, below +3.5% expected.
  o    FOMC Policy Decision: Fed Funds Rate left unchanged (5.25-5.50%) Dot plot shows one cut in 2024, down from three, though votes teetered on one to two cuts; core inflation projection bumped up to 2.8% from 2.6%; Powell reiterates data dependency, meeting by meeting approach, and needs to see more consistent progress on inflation before rate cut.
• Thursday (June 13): 
  o    PPI Headline -0.2%, below +0.1% expected; PPI YoY +2.2%, below +2.5% expected; Core PPI 0.0%, below +0.3% expected; Core PPI YoY +2.3%, below 2.4% expected.
  o    Weekly Jobless Claims came in at a nine-month high of 242K vs. 226K expected.
• Friday (June 14): University of Michigan Consumer Sentiment fell to a seven-month low (65.6 vs. 71.5 expected); Current Economic Conditions dropped to 62.5 from 69.6 (below 72.0 expected), representing the lowest read since December of 2022; year-ahead inflation expectations were unchanged at 3.3%, but long-run inflation expectations ticked up to 3.1% from 3.0% in the prior month.

Bond yields are down significantly on a week-over-week basis and are at fresh two-month lows this morning. Yields on the 10-year are down roughly 20 basis points (4.22% from 4.43% last Friday) while two-year yields are down nearly the same amount (4.69% from 4.88% last Friday).

Also worth noting is several Treasury bond auctions that were well received by investors. You might recall that two weeks ago there was weak demand for several auctions, which sent rates higher, so this week’s stability is welcome news for the bulls.

Market hopes around the potential for Fed rate cuts saw a marked increase, driven by cooler-than-expected inflation data. The Bloomberg probability of a September rate cut currently sits at 80% versus 55% last Friday. However, keep in mind last Friday's strong Nonfarm Payrolls report which pushed rate cut probabilities lower across the curve.

The S&P 500 is coming off another record closing high yesterday, which has largely been driven by the outperformance in mega-cap tech. The recent rally has taken the Relative Strength Indicator (RSI) above the 70 level, which is typically considered "overbought status." However, an overbought RSI won't tell you when a pullback is going to occur, but it does signal that one may be approaching. If you look at the one-year SPX daily chart below, you can see in the bottom panel (which contains the RSI study) how often the index pushed above the 70 level and how long it took before some type of a consolidation/mean-reversion pullback took place. We peaked above the 70 level this week and appear to be rolling over a little today. Also worth noting is June seasonality, which has been in the bottom quartile of performance for the SPX over the past 20 years. Near-term technical translation: slightly bearish

I'm a little more cautious on the Nasdaq Composite vs. the SPX given the current RSI reading of 76, but a (profit taking) pullback in the COMPX will have its impact on the SPX since SPX has a relatively large percentage of tech stocks as its members. Additionally, since NVIDIA has so much influence on the overall stock market, both in terms of market weighting and investor sentiment, its important to note that NVIDIA's RSI is currently at 80. Back on March 8th when NVDA had its key reversal day (i.e. large bearish engulfing candle at, then, fresh all-time highs), the RSI was at 83. Tech stocks could continue to rally in the near-term, but we should at least acknowledge that we are stretched to the upside and susceptible to a pullback at some point. 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. On a week-over-week basis, the majors have seen a degradation in breadth over the past month or so, following a rebound from mid-April to mid-May. As Joe mentioned last week, market leadership has been concentrated within mega-cap tech and this stat helps convey that—SPX breadth has dropped from the late March high of 85% to the current level of just 68%. Versus last Friday, the SPX (white line) breadth moved down to 68.88% from 69.08%, the COMPX (blue line) ticked up slightly to 43.59% from 43.21%, and the RUT (red line) dropped slightly to 50.65% from 50.94%.

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 (17 today): Apple Inc. (AAPL - $1.17 to $213.07), Broadcom Ltd. (AVGO + $36.61 to $1,715.60), Costco Wholesale Corp. (COST + $0.30 to $846.26), CrowdStrike Holdings Inc. (CRWD + $3.88 to $386.69), First Solar Inc. (FSLR - $9.99 to $281.57), Microsoft Corp. (MSFT - $0.48 to $441.10), Nvidia Corp. (NVDA + $1.92 to $131.53)

This Week's Notable 52-week Lows (112 today): Capri Holdings Ltd. (CPRI - $0.41 to $31.77), Galapagos NV (GLPG - $0.37 to $25.35), Green Plains Inc. (GPRE - $0.39 to $15.24), Ingles Markets Inc. (IMKTA - $0.67 to $67.64), Mosaic Company (MOS - $0.49 to $27.09), Snowflake Inc. (SNOW - $0.44 to $125.42), Teladoc Health Inc. (TDOC - $0.05 to $9.89)