Weekly Trader's Outlook

If you read last week's blog, you might recall that my outlook for this week was "bullish." As of mid-morning Friday, the S&P 500^® and Nasdaq^® Composite are both up slightly while the Russell 2000 exhibited a bit of relative strength being up roughly 1% on the week. Last week I talked about the potential rotation into lower quality, underperforming sections of the market, like the RUT, and there was some continuation of that this week, but tech also got money flow over renewed AI optimism. Alphabet debuted their new multimodal AI system Gemini and AMD unveiled a new generation of AI chips (MI300) which are expected to compete with Nvidia's flagship AI processors and raised expected AI data center chip revenue forecast from $200B to $400B. The AI secular growth story is one of the pillars in the bull's thesis as it may help justify higher multiples across the tech space. We also received evidence of additional slack developing in the labor market as Tuesday's job opening data dropped to a two-year low. This data confirms the rising continuing jobless claims that we've seen recently and suggests that those who have been laid off are having a harder time finding a new position. This morning's Nonfarm Payrolls report however came in slightly above estimates (199K vs. 190K est) and the Unemployment Rate ticked down to 3.7% (below the 3.9% expected), so it's a little too early to ascertain just how soft the labor market is.

Stocks are modestly higher with roughly two hours left in the session and the SPX currently remains below key resistance at 4,600 by a couple of points. Next week we've got several potential catalysts being served to investors (CPI, PPI, and FOMC), and as I mentioned in the Technical Take section below, it feels like the set-up could create somewhat of a bifurcated move. Yields on the 10-year are up 11 basis points on today's Nonfarm Payrolls report and the potential for more bond market volatility is high given those potential catalysts. Therefore, my outlook for next week is "Breakout." My definition of "breakout" is greater than 1.0% either higher or lower in the SPX by next Friday. While I don't necessarily expect any significant deviation from Chairman Powell's data-dependent stance, the potential is there. Add in a technical battleground around 4,600 in the SPX, it feels like it could get volatile next week. Of course, the data and commentary just come out as expected and perhaps we continue to churn sideways like we've been doing so far in December.

Economic:

• Tuesday (12/12): Consumer Price Index (CPI) 
• Wednesday (12/13): Producer Price Index (PPI), FOMC Rate Decision
• Thursday (12/14): Initial Jobless Claims, Retail Sales
• Friday (12/15): Empire State Manufacturing

Earnings:

• Monday (12/11): Oracle (ORCL), Casey's General Stores (CASY)
• Wednesday (12/13): Adobe (ADBE)
• Thursday (12/14): Costco Wholesale (COST), Lennar (LEN)
• Friday (12/15): Darden Restaurants (DRI)

As mentioned above, evidence of labor market slack showed up in Tuesday's Job Openings and Labor Turnover Survey (JOLTS), which came in at the lowest levels since March of 2021 (8.773M vs. 9.4M est). However, continuing claims, which recently hit two-year highs, fell by 64,000 from the previous week, which was the biggest drop since July. This is only the second time in 11 weeks that continuing claims have declined. This week's employment data suggests that while there will likely be some volatility in future data points, the intermediate trend still points to a softer overall job market. Also encouraging for the bulls was an upward revision in Productivity (to 5.2% from a previously reported 4.9% pace) and a downward revision in unit labor costs (to 2.6% from 3.2%).  

Yields on the 10-year Treasury hit a fresh three-month low of 4.106% yesterday but are rising ~12 basis points today to 4.25% following this morning's employment data. Given the ~90 basis point decline in 10-year yields over seven weeks, perhaps we dropped too far too fast? Today's rise doesn't alter the recent downtrend, but maybe it suggests that we've gotten too optimistic around the trajectory of yields and velocity of potential Federal Reserve cuts next year.

Speaking of the Fed, the Bloomberg probabilities of a Fed cut next year have moved lower week-over-week. Last Friday there was roughly a 76% chance of a Fed cut at the March FOMC meeting and today it stands at 48%. While there isn't expected to be any surprises at next week's FOMC meeting, there is always the potential for Fed Chair Jerome Powell to convey a more hawkish stance than market expectations. The Fed will have some additional inflation data to consider before the rate policy announcement with November's Consumer Price Index (CPI) coming out on Tuesday morning and the Producer Price Index (PPI) on Wednesday.

S&P 500 (SPX + 7 to 4,592)

The SPX has essentially been in a sideways consolidation pattern following November's 8.9% rally. The recent rally has taken the index into the 4,600 resistance level, a level where the index has backed off from three times over the past two years (February 2022, March 2022 & July 2023). We briefly traded above 4,600 this morning but once again encountered some selling pressure, like we did on December 1st and December 6th (red arrows below). However, the difference with this most recent encounter with 4,600 is that we are not aggressively pulling back like we did in the prior three instances. This behavior is more bullish in nature since it suggests we might be setting up for a breakout above this level given the evidence of bid support this month. However, if we can't firmly break above this level, it may reinforce the resistance (i.e. reinforce near-term asymmetric risk-reward dynamics) and trigger a shift in sentiment from bullish to bearish. Given the set-up next week with CPI, PPI and FOMC, it seems likely that we will know, one way or the other, just how strong this resistance level turns out to be. Near-term technical translation: bullish if SPX breaks above 4,600, bearish if not (breakout).

Russell-2000 (RUT + 7 to 1,875)

I talked about the (bullish) inverse head and shoulders pattern that the showed up on the RUT chart back in October/November, but more recently it appears that we might have formed the flag on a bull flag chart pattern this week. In order to get bullish confirmation, some technicians would like to see an upside breakout that eclipses the high point of the chart pattern (roughly 1,882). We haven't quite done that yet, but this development will be something to monitor next week. Regardless, the index has been in an uptrend since the end of October and resistance doesn't seem to come into play until the index gets to 1,900, and then longer-term key resistance around 2,000. Near-term technical translation: bullish
 

Below is a Bloomberg chart showing the current % of members of the S&P 500, Nasdaq Composite and Russell 2000 that are trading above their respective 200-day Simple Moving Averages. We've seen some broadening of breadth across the board on a week-over-week basis–SPX (white line) is up to 64.46% from 61.24%, COMPX (blue line) is up to 42.15% from 36.29%, and the RUT (red line) is up to 51.06% from 43.21%. The improvement is relatively good news for the bulls and suggests improved health in the recent stock rally.

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, percent 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 (125 today): Accenture PLC (ACN + $1.65 to $336.75), Affirm Holdings Inc. (AFRM + $1.12 to $40.54), Coinbase Global Inc. (COIN + $4.92 to $141.11), CrowdStrike Inc. (CRWD + $0.29 to $240.46), Gitlab Inc. (GTLB - $0.53 to $58.53), Sentinel One Inc. (S - $0.03 to $23.39), T-Mobile US (TMUS + $0.08 to $156.47)

This Week's Notable 52-week Lows (39 today): Alibaba Holdings Inc. (BABA - $0.07 to $72.26), Box Inc. (BOX + $0.37 to $24.58), Franco-Nevada Corp. (FNV + $1.23 to $108.64), Johnson Outdoors Inc. (JOUT - $6.82 to $47.65), Nabors Industries (NBR + $1.73 to $81.59), Woodside Energy Group Ltd. (WDS + $0.34 to $19.58), Yum China Holdings Inc. (YUMC + $0.21 to $40.16)