Weekly Trader's Outlook

If you read last week's blog you might recall that my forecast for this week called for "elevated volatility" with an overall "slightly bearish" outlook. While we saw an uptick in volatility (the VIX hit a year-to-date high of 22 on Monday), the S&P 500 is on track for the largest weekly gain (+3.0%) since November, so my forecast turned out to be wrong. However, I did note last Friday that this week's fate would be tied to the monthly CPI/PPI data and corresponding move in bond yields, and the cooler-than-expected reports (see "Economic Data, Rates & the Fed" section below) sent yields lower and triggered a bullish bounce for stocks. Given last week's sell-off in stocks, driven in part by the hot ISM Services Prices Index reading (64.4 in December vs. 58.2 in November), I feel that this week's rally is more of a relief bounce than a belief that inflation concerns are behind us. The U.S. economy is strong, which supports demand and therefore firm prices, and policies from the incoming administration at least provides the potential for inflationary forces to emerge.

Aside from the potential for re-inflationary trends and higher yields, the big banks reported Q4 earnings this week and the strong results help support the bull thesis that the strong economy will translate into corporate earnings growth in 2025. Currently, FactSet is forecasting Q4 earnings growth of 11.7% for the S&P 500, which would represent the highest year-over-year EPS growth since Q4 2021. Although it's early, so far 42/500 S&P 500 companies have reported results and revenue growth is currently tracking at +7.11% and earnings growth is +21.94%. For the full-year 2025 FactSet expects S&P earnings to increase 14.8% year-over-year.

At the time of this writing (12:50 p.m. ET), all the major indices are trading near the highs of the session (DJI + 472, SPX + 73, COMP + 329), which appears to be driven by stable bond yields and perhaps some optimism around policy shifts from the incoming Trump administration. It's unclear at this point what the net effect of any policy changes will mean to earnings and inflation, but the prospect for corporate-friendly initiatives (ex. tax cut extensions, deregulation and pro-growth policies) is what ignited the post-election rally in stocks last November. Next week the economic calendar is light which means the focus will be on Q4 earnings reports and any policy announcements from the Trump administration. Of course, which direction bond yields move will impact the direction for stocks, but this week's pullback in bond yields (10-year yields down ~20 basis points) somewhat softens the importance, at least for now. Given the potential for tariff announcements from the Trump administration early next week, along with the near-term overbought technical set-up, I think we could see some weakness in the early part of the week, especially if yields being to move higher on any such announcements. Therefore, I'm going to go with a "slightly bearish" forecast for next week. The outlook feels counter to today's bullish price action, but mean reversion is real and sometimes one has to zig when the market is zagging. What could challenge my outlook? Lower bond yields or positive pro-growth policy announcements could lead to another up week.  

Other Potential Market-Moving Catalysts:

Economic:

• Monday (1/20): no reports
• Tuesday (1/21): no reports
• Wednesday (1/22): EIA Crude Oil Inventories, Leading Indicators, MBA Mortgage Applications Index
• Thursday (1/23): Continuing Claims, EIA Natural Gas Inventories, Initial Claims
• Friday (1/24): Existing Home Sales, University of Michigan Consumer Sentiment - Final

Earnings:

• Monday (1/20): no reports
• Tuesday (1/21): Charles Schwab Corp. (SCHW), Prologis Inc. (PLD), 3M Co. (MMM), D.R. Horton Inc. (DHI), Fifth Third Bancorp (FITB), KeyCorp (KEY), Netflix Inc. (NFLX), Interactive Brokers Group Inc. (IBKR), Capital One financial Corp. (COF), United Airlines Holdings Inc. (UAL), Seagate Technology Holdings PLC (STX)
• Wednesday (1/22): Procter & Gamble Co. (PG), Johnson & Johnson (JNJ), Abbott Laboratories (ABT), GE Vernova Inc. (GEV), Travelers Companies Inc. (TRV), Halliburton Co. (HAL), Kinder Morgan Inc. (KMI), Discover Financial Services (DFS), Alcoa Corp. (AA), Knight-Swift Transportation Holdings Inc. (KNX)
• Thursday (1/23): GE Aerospace (GE), Union Pacific Corp. (UNP), Elevance Health Inc. (ELV), Freeport-McMoRan Inc. (FCX), Northern Trust Corp. (NTRS), American Airlines Group (AAL), Alaska Air Group Inc. (ALK), Intuitive Surgical (ISRG), Texas Instruments Inc. (TXN), CSX Corp. (CSX)
• Friday (1/24): American Express Co. (AXP), Verizon Communications Inc. (VZ), Nextera Energy Inc. (NEE), HCA Healthcare Inc. (HCA), Northwest Bancshares Inc. (NWBI)

There was a heavy dose of economic data for markets to digest this week. In short, the data continues to convey a healthy economy and the monthly inflation data came in cooler than expected, prompting some bond buying and a corresponding drop in yields. Here's the breakdown from this week's reports:

• Consumer Price Index (CPI): The headline month-over-month (MoM) increased 0.4% (above the +0.3% expected), putting the year-over-year (YoY) gain at +2.9% (in-line with estimates). Core CPI MoM was +0.2% (in-line with estimates) while the Core CPI YoY came in at +3.2% (0.1% below estimates and 0.1% lower than the prior month YoY print). Shelter prices rose by 0.3% MoM and +4.6% YoY, which represents the smallest one-year gain since January 2022.
• Producer Price Index (PPI): The headline MoM increased 0.2% (below the +0.3% expected), putting the YoY gain at +3.3% (0.2% below estimates, but up from +3.0% seen in November). Core PPI MoM was flat (0.3% below estimates) while the Core PPI YoY came in at +3.5% (0.3% below estimates, but 0.1% higher than the prior month YoY print).
• Retail Sales: Headline increased 0.4% in December, down from the +0.8% gain in November and below the +0.6% expected. Core retail sales increased 0.4%, above the +0.2% reported in November but below the +0.5% economists had expected. However, the control group (a subset of retail sales categories used to calculate GDP) increased 0.7% which was above the +0.4% expected.
• Building Permits: 1,483K, above the 1,465K expected.
• Housing Starts: 1,499K, above the 1,300K expected.
• NFIB Small Business Optimism Index: rose 3.4 points in December to 105.1, representing the highest reading since October of 2018.
• Initial Jobless Claims: Increased to 217K from 203K in the prior week and above the 210K expected. Continuing Claims dropped 18K to 1.859M from 1.877M last week.
• The Atlanta Fed's GDPNow "nowcast" for Q4 was revised higher to 3.0% yesterday from 2.7% on January 9th.

U.S. Treasuries found some buyers this week following the benign CPI/PPI day and yields on the 10-year saw a decided pullback from the 52-week highs hit last week. Compared to last Friday, two-year Treasury yields are down ~12 basis points to 4.261% from 4.383% and 10-year yields are lower by ~17 basis points to the current 4.605% from 4.776%.

Expectations around future potential rate cuts from the Federal Reserve took a modest dovish turn this week, primarily driven by the encouraging inflation data. Looking at the Bloomberg probabilities, the first Federal Open Market Committee (FOMC) meeting that has an above 50% chance for a 25-basis-point cut is May (~53%). Last week the May probability was 42%. For the full year, markets are still expecting somewhere between one to two 25-basis-point cuts.

There were a couple of incrementally bullish technical developments for the S&P 500 (SPX) this week. First, the index opened below the 100-day Simple Moving Average (SMA) on Monday but ended up closing above this indicator, which is the definition of support. The SPX then rallied ~3% over the course of the week and is currently above the downward trending channel that has been in place since early December. Given this week's rally we are a little near-term overbought, but net-net this week's price action is bullish. Near-term technical translation: slightly bullish

The Russell 2000 index (RUT) benefitted from this week's drop in bond yields and the welcome recovery coincided with a bounce off the 200-day Simple Moving Average (SMA). The RUT found support at the 200-day SMA back in August and September of last year, so this week's bounce helps reinforce that notion. While this is an encouraging development for the bulls, I think the RUT will likely need bond yields to continue to ease in the coming weeks to help fundamentally support the relatively bullish technical. Near-term technical translation: slightly bullish

Bitcoin prices are up ~5% to a one-month high of $104,759 today following a Bloomberg report that President-elect Donald Trump is planning on releasing an executive order elevating crypto as a policy priority and will create a crypto advisory council. The news comes ahead of Trump's inauguration next week and a first-ever "Inaugural Crypto Ball" is being held tonight in support of the new administration.

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 weekly gains and bond yields cooled off, resulting in an expansion in market breadth. On a week-over-week basis, the SPX (white line) breadth is up to 60.80% from 55.82%, the CCMP (blue line) ticked up to 46.40% from 45.82%, and the the RTY (red line) moved up to 52.26% from 49.90%.

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 (84 today): Antero Resources Group (AR - $0.51 to $40.06), Beacon Roofing Supply Inc. (BECN + $0.87 to $115.47), Citigroup Inc. (C + $0.49 to $79.00), Mastec Inc. (MTZ - $0.27 to $155.05), NRG Energy (NRG - $2.13 to $103.87), Whirlpool Corp. (WHR + $0.21 to $129.08)

This Week's Notable 52-week Lows (23 today): Biogen Inc. (BIIB + $0.67 to $141.90), Conagra Brands Inc. (CAG - $0.01 to $25.78), Dollar General Corp. (DG + $0.21 to $69.47), General Mills Inc. (GIS + $0.31 to $59.47), Hershey Foods Corp. (HSY - $0.14 to $153.88), J.M. Smucker Company (SJM + $1.09 to $103.63)