Weekly Trader's Outlook

If you read last week's blog from my colleague Nate Peterson, you might recall that his outlook for this week was "bullish for the first half of the week and slightly bearish for the back half," citing the risks of a technically overbought market fueled by a rekindling of animal spirits, leading to large equity inflows that seemed impervious to stretched valuations. S&P forward earnings multiples eclipsed 22x, as markets were essentially pricing in a best-case scenario for stocks heading into the end of the year. What I found particularly interesting was how stocks were able to soar in the immediate aftermath of the election at the same time bond yields were rocketing back towards yearly highs. It seemed something had to give. Well something did give, and Nate was right. After starting the week with minimal gains on Monday and Tuesday that pushed the S&P 500 to an all-time-high of 6,010, markets began to roll over mid-week. This was likely fueled by a continued rise in interest rates, as the 10-year yield rallied from 4.30 to 4.50%. How much of this move in rates was from better-than-expected data from the week's economic calendar, versus how much was due to inflationary concerns around upcoming changes to fiscal policy remains to be seen. We do know, however, that the Federal Reserve is monitoring the economic data very closely and is ready to slow its course of rate cuts if necessary. Powell acknowledged as much in his Thursday speech in Dallas, saying, "The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully." Markets didn't respond favorably to those remarks, printing lows on Thursday's close. Another item of note is the rather strong sector rotation that continues to occur this week, as investors move out of Information Technology and into the more cyclical sectors, such as Financials, Industrials, and Energy. This will be something to monitor in the coming weeks, given the Market Cap of the IT sector and its 31% weight in the S&P 500. Can the overall market hold up under these circumstances? Time will tell, as bulls might lose some ground in the interim.

At the time of this writing (12:00 p.m. ET), all the major indices are trading lower and near the lows of the day (DJI - 353, SPX - 91, COMP - 490). Additionally, the SPX has pulled back below the psychologically important 6,000 level and is now testing the 20-day moving average at $5,860, representing a 2.50% pullback from Monday's high. I wouldn't consider this a major pivot point, but something to keep an eye on next week. Should that level break, then the 50-day moving average at $5,770, a more important level in my mind, becomes the one to key in on (more on this in the "Technical Take" section below). From a near-term perspective, while the new all-time highs we set earlier in the week remain bullish, there has been evidence that the recent rally is facing some exhaustion, given the rollover in both the price action and the RSI which has pulled back from a 70 level down to around 51. It would behoove the bulls to try and hold these levels, as a further down move could prompt more selling into the close, as investors potentially de-risk into the weekend. This could prove slightly ominous for next week's price action. Next week's economic calendar starts slowly with a focus on housing data, via the NAHB Housing Market Index, Housing Starts, and Building Permits. The more potentially market-moving data is positioned at the back end, as we get Initial and Continuing Jobless Claims, along with S&P Global PMI Reports and U of Mich Consumer Confidence to close out the week.

Don't forget, we also get a slew of Retail and Technology earnings from the likes of Walmart, Lowe's, Target, TJX, PANW, SNOW as well as what is likely the major earnings announcement of the week on Wednesday from Nvidia Corp. This could be a major market mover, as the company's revenue, earnings growth, and forecast could send reverberations throughout the AI tech space!

I wouldn't be surprised to see an attempt to rally from these levels at the beginning of the week if we can bounce from today's lows into the close. If the rally doesn't materialize early in the week, then the 50-day moving average, another 1.50% lower from current levels, could come into play. Therefore, my forecast for next week is "a slight bounce for the first half of the week with consolidation into the back half." What could challenge my outlook? Further rotation out of the largest market cap sector, Information Technology, or a negative response to Nvidia's guidance, leading to a further downdraft in overall price action.  Investors may be holding their collective breadth until Nvidia's report on Wednesday.

Other Potential Market-moving Catalysts:

Economic:

• Monday (11/18): NAHB Housing Market Index
• Tuesday (11/19): Housing Starts, Building Permits
• Wednesday (11/20): MBA Mortgage Applications Index
• Thursday (11/14): Initial & Continuing Claims, Leading Index, Existing Home Sales
• Friday (11/15): S&P Global Manufacturing & Services PMI, U of Mich Consumer Confidence

Earnings:

• Tuesday (11/19): Walmart Inc. (WMT), Medtronic (MDT), Lowe's Companies Inc. (LOW), Weibo Corp. (WB)
• Wednesday (11/20): Target Corp. (TGT), Williams-Sonoma Inc. (WSM), NIO Inc. (NIO), TJX Companies Inc. (TJX), Nvidia Corp. (NVDA), Palo Alto Networks Inc. (PANW), Snowflake Inc. (SNOW)
• Thursday (11/21): Deere & Co. (DE), Baidu Inc. (BIDU), Intuit Inc. (INTU), Copart Inc. (CPRT), Ross Stores Inc. (ROST), Gap Inc. (GAP)
• Friday (11/22): Buckle Inc. (BKE)

This week there was a Federal Open Market Committee (FOMC) meeting, but it didn't contain a lot of surprises. As expected, the Fed delivered a 25-basis-point cut, noting that the economy remains firm. While the Fed acknowledged that inflation has made progress towards the Committee's 2.0% objective, it remains "somewhat elevated." The rate cut probabilities have been trending towards a "higher for longer" stance over the past month, and generally that trend remains intact. Outside of the Fed, Services data continued to remain strong and weekly Claims data remained relatively subdued. Here's the breakdown from this week's reports:

• Consumer Price Index (CPI): Rose 0.2% m/m and 2.6% y/y, Core CPI (ex-food and energy) up 0.3% m/m and up 3.3% y/y, all figures came in as expected, showing inflation remains sticky at these levels.
• Producer Price Index (PPI): Up 0.2% m/m and 2.4% y/y (yearly change hotter than expected), Core PPI (ex-food and energy) up 0.3% m/m and up 3.1% y/y, both of these figures were higher than expected.
• NFIB Small Business Optimism:  Came in at 93.7, better than the expected 92.0.
• Initial Jobless Claims: 217K, down 3K from the prior week and slightly below economists' expectations. Continuing Claims dropped to 1.873M from 1.892M last week.
• Retail Sales:  Climbed 0.4% m/m, beating estimates, while the Retail Sales Ex-Auto came in below estimates with a 0.1% m/m increase.

Bond yields jumped to multi-month highs this week, at one point eclipsing 4.50%, as traders digest the better-than-expected economic data, the effects of proposed fiscal reforms from the new government, and the revised probabilities of Fed rate cuts in 2024 and 2025. The 4.50% print on the 10-year yield this week represents a 90-basis point rally from the September low print of 3.60%.  You can now hear a pin drop in the refinance market!

As mentioned above, expectations around future Fed rate cuts continued to come in this week. Currently, the CME FedWatch tool suggests probabilities are now 62% for a 25-basis-point cut at the December FOCM meeting, down from 85% two weeks ago. Looking further out in time, probabilities are now suggesting 50 basis points of cuts between now and the end of 2025 versus 100 to 125 basis points of two weeks ago.

The S&P 500 index (SPX) lost some momentum after setting an all-time-high earlier this week, and is now down 2.30% on the week, testing the 20-day MA. Should that fail, there is a strong chance, we see a test of the 50-day MA which has been a good support level since the second week of September. The RSI pulled back from a high mark of 70 down to its current level of 51, which could indicate buyer exhaustion. Bulls will want to see both a bounce off the 20-day MA and a bounce off the RSI 50 level to feel better about the prospects of a return retest of the 6,000 level. If that doesn't occur, then we could see near-term consolidation between 5750 and 5900. Therefore, given this week's pullback from all-time highs and the swift move down in the RSI, the set up for next week leans cautious in my view. Near-term technical translation: slightly bearish

What had been the index benefitting most from the "Trump Bump," the Russell 2000 index (RUT), experienced the biggest drawdown of the week, more than 4%. This comes on the heels of the Russell setting a three-year high price of $2441.72 and coming within a stone's through of the all-time high mark of $2458.86, set back in December of 2021. The price action for this index is more volatile than what we saw in the SPX. Those four consecutive negative red candles are not a good omen, nor is the fact that the last candle could potentially fill the gap created from last week's election. Time will tell if that holds, but as of now, it appears the 20-day MA could be in play next week. Bulls will want to see a successful defense of the election gap and 20-day MA to feel conviction heading into the end of the week should a retest occur. We did see a pullback on the RSI, as well, from an overbought 75 level back to 51 today. Bulls will want to see that 50-level hold as well.  Near-term technical translation: slightly 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. There was a quick reversal of market breadth once the indexes began to sell-off intra-week. On a week-over-week basis, the SPX (white line) breadth fell from 75% to 68%, the CCMP (blue line) fell from 51% from 42%, and the RTY (orange line) dropped from 67% from 65%.

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 (76 today): Palantir Technologies Inc. (PLTR + $5.32 to $64.50), Bloom Energy Corp. (BE + $7.87 to $21.15), Ionq Inc. (IONQ + $1.56 to $27.72), Kenvue Inc. (KVUE + $0.45 to $24.06)

This Week's Notable 52-week Lows (315 today): Pfizer Inc. (PFE - $1.27 to $24.75), Lucid Group Inc. (LCID - $0.08 to $2.00), Super Micro Computer (SMCI - $0.24 to $17.77), Moderna Inc. (MRNA - $2.44 to $37.33)