Weekly Trader's Outlook

If you read last week's blog, you might recall that I had a "Moderately Bearish" forecast for this week, citing spiking Treasury yields, some technical deterioration along with a potential "sell on the news" reaction to Nvidia's earnings report. At the time of this writing, the S&P 500 index is on track to be up about 1% on the week, the Nasdaq 0.7%, and the Russell 2000 up 2.7%, so my forecast turned out to be wrong. Stocks sold off for the first two days of this week, but subsequently bounced, buoyed by easing oil prices and longer-term Treasury yields. It seems that these are the levers currently driving the near-term price action—higher oil prices seem to lift longer-Treasury yields (due to potential inflation impact), which generally triggers selling in stocks. When oil prices decline the opposite generally occurs. Of course, any development or social media post by President Donald Trump regarding the Iran conflict influences oil prices. Trump delivered a couple of posts around progress with Iran peace talks this week, but there still appears to be some sticking points preventing an actual resolution, namely Iran's nuclear enrichment and "tolling system" on the Strait of Hormuz. Still, WTI crude is on track to be down ~8% (July futures last seen trading at $96.44/barrel), and Treasury yields on the 10- and 30-year are on track to be down two and five basis points (respectively) on the week.

Outside of geopolitics, artificial-intelligence (AI)-darling Nvidia reported a solid "beat and raise" quarter on Wednesday, but as has often been the case, the report failed to generate a bullish post-earnings reaction. That didn't stop the money flow to chip stocks as the PHLX Semiconductor Index (SOX) is trading at all-time highs today (more on this in the "Technical Take" section below). Additionally, software stocks saw some money flow as the iShares Expanded Software ETF (IGV) hit the highest levels since January today (healthy earnings from Workday helped sentiment in the space).

Regarding the status of the Q1 earnings scorecard, out of the 472 S&P 500 companies that have reported, 74% have beaten on the top line and 82% have beat on the bottom line. Q1 revenue growth has been tracking at 11.14% while earnings-per-share (EPS) growth is 27.49% thus far, both metrics ticking up from last week.

At the time of this writing (2:45 p.m. ET) stocks are higher across the board though off the highs of the session (DJI + 431, SPX + 45, $COMP + 119, RUT + 28) as investors lean optimistically heading into the three-day weekend. Yesterday President Trump said that the Iran war will end "very quickly" and earlier today the Secretary of State indicated that he has seen "a little bit of movement" towards a peace deal between the U.S. and Iran. Oil prices are essentially flat and Treasury yields are slightly lower today, but as I mentioned in the opener, there are still some sticking points around a potential deal. Hopefully peace prevails, and the sooner the better for stocks, but for now it remains a risk given the potential inflation implication. Next week there will be several key tech earnings reports (Dell, Marvell, Salesforce, Snowflake, etc.) and several high-profile retailers (Abercrombie & Fitch, Autozone, Best Buy, DICK's Sporting Goods, etc.). On the economic front, we'll get the monthly Personal Consumption Expenditures (PCE) Prices report (the Federal Reserve's preferred inflation gauge) along with an update to the Q2 gross domestic product (GDP) estimate. However, it seems likely to me that the trajectory in oil prices and subsequently, Treasury yields, will be the primary drivers of price action. This of course infers progress, or lack of, related to a potential Iran peace deal is a dominant factor. Technically, I'm encouraged to see fresh all-time highs in both the S&P 500 Equal Weight and the Dow Jones Industrial Average today, which are both bullish and indicate a healthy broadening of the rally. What's interesting is that the SOX is hitting fresh all-time highs today and software stocks are also participating to the upside, so the broader participation is a signal of a healthy rally. Yes, the SOX is trading 60% above its 200-day SMA, so it's still stretched from an intermediate-term perspective, but near-term the bullish momentum exhibited a resurgence this week and I'll certainly respect that. Therefore, I'll provide a "Bullish" forecast for next week. What could challenge my outlook? A degradation in Iran peace talks, higher oil prices and higher Treasury yields could all derail the bulls.

• Monday (May 25): no reports
• Tuesday (May 26): Consumer Confidence, FHFA Housing Price Index, S&P Case-Shiller Home Price Index
• Wednesday (May 27): MBA Mortgage Applications Index, New Home Sales
• Thursday (May 28): Continuing Claims, Durable Goods, EIA Crude Oil Inventories, EIA Natural Gas Inventories, Q2 GDP – Second Estimate, Initial Claims, PCE Prices, Personal Income, Personal Spending
• Friday (May 29): Advanced International Trade in Goods, Advanced Retail Inventories, Advanced Wholesale Inventories, Chicago Purchasing Managers' Index (PMI)

• Monday (May 25): JOYY Inc. (JOYY), Fathom Holdings Inc. (FTHM)
• Tuesday (May 26): AutoZone Inc. (AZO), Banco BBVA Argentina SA (BBAR), Box Inc. (BOX), Champion Homes Inc. (SKY), CSW Industries Inc. (CSW), Elbit Systems Inc. (ESLT), Ituran Location and Control Ltd. (ITRN), Modine Manufacturing Co. (MOD), Semtech Corp. (SMTC), Sociedad Quimaca y Minera de Chile SA (SQM), VNET Group Inc. (VNET)
• Wednesday (May 27): Abercrombie & Fitch Co. (ANF), Agilent Technologies Inc. (A), Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Bath & Body Works Inc. (BBWI), Everpure Inc. (P), DICK's Sporting Goods Inc. (DKS), Dycom Industries Inc. (DY), HP Inc. (HPQ), Marvell Technology Inc. (MRVL), PDD Holdings Inc. (PDD), Salesforce Inc. (CRM), Snowflake Inc. (SNOW), Synopsys Inc. (SNPS)
• Thursday (May 28): Autodesk Inc. (ADSK), Best Buy Co. Inc. (BBY), Burlington Stores Inc. (BURL), Canadian Imperial Bank of Commerce (CM), Costco Wholesale Corp. (COST), Dell Technologies Inc. (DELL), Dollar Tree Inc. (DLTR), Futu Holdings Ltd. (FUTU), Gap Inc. (GAP), Hormel Foods Corp. (HRL), MongoDB Inc. (MDB), NetApp Inc. (NTAP), Okta Inc. (OKTA), Royal Bank of Canada (RY), Toronto-Dominion Bank (TD)
• Friday (May 29): Buckle Inc. (BKE), Chagee Holdings Ltd. (CHA), Genesco Inc. (GCO), NextTrip Inc. (NTRP)

There was a relatively light dose of economic data for markets to digest this week, highlighted by the S&P PMI reports. The S&P Manufacturing PMI registered the highest reading in four years, while the S&P Services PMI showed some slowing, albeit still in expansionary territory (>50.0). Elsewhere, some recent economic themes were observed—consumer confidence continued to be lousy, hurt by rising prices and higher uncertainty, while weekly jobless claims remain subdued. Also noteworthy, the Atlanta Fed Nowcast for Q2 GDP was once again revised higher, not sitting at +4.3%. Here's a breakdown of the reports:

• S&P Global U.S. Manufacturing PMI - Preliminary: Increased to 55.3 in May from 54.5 in April, which was above the 53.8 expected and represents the highest reading since May of 2022. Prices paid by factories for inputs jumped to 79.5 in May from 68.4 in April, which represents the highest reading since June of 2022. Output prices rose to 63.3 from 61.7 in April, which represents the highest level since September 2022.
• S&P Global U.S. Services PMI - Preliminary: Declined slightly to 50.9 in May from 51.0 in April, and below the 51.1 preliminary estimate.
• Leading Economic Index: Increased by 0.1% in April to 97.4, following a 0.6% drop in March. The gain was largely driven by a rebound in stock prices and an increase in building permits.
• University of Michigan Consumer Sentiment: Fell for the third straight month to 44.8 in May from 49.8 in April and below the 48.0 economist were expecting. Respondents cited the cost of living and inflation as concerns. The Current Index fell to 44.8 from 49.8 and the Expectations Index fell to 44.1 from 48.1 (both month-over-month).
• Philadelphia Fed Index: -0.4 vs. 18.0 est.
• Pending Home Sales: 1.4% vs. 1.4% est.
• NAHB Housing Market Index: 37 vs. 33 est.
• Building Permits: 1.442M vs. 1.360M est.
• Housing Starts: 1.465M vs. 1.450M est.
• EIA Crude Oil Inventories: -7.863M barrels.
• EIA Natural Gas Inventories: +101 bcf.
• Initial Jobless Claims: Initial applications for U.S. jobless benefits decreased 3K from last week's (upwardly revised) 212K to 209K, which was above the 205K economists had expected. Continuing Claims increased 6K from the prior week to a seasonally adjusted 1.782M.
• The Atlanta Fed's GDPNow "nowcast" for Q2 GDP was revised up to 4.3% yesterday from 3.0% last week.

The recent surge in U.S. Treasury yields settled down this week, though there was some "yield creep" at the front of the curve. This week's rise in two-year yields, coupled with a drop in longer-dated maturities created some flattening of the yield curve. For reference, two-year yields are essentially at a 52-week high today. Compared to last Friday, two-year Treasury yields are up ~5 basis points (4.13% vs. 4.084%), 10-year yields declined ~2 basis points (4.572% vs. 4.595%), while 30-year yields decreased ~5 basis points (5.082% vs. 5.13%).

Market expectations around the Federal Reserve's monetary policy once again saw a notable push towards rate hike expectations, which may have been influenced by the prices paid component of the S&P Manufacturing Index, and Warsh being sworn in as Fed chair today. Per the Bloomberg rate probabilities, markets are now putting a theoretical 100% chance of a Fed rate hike at the December Federal Open Market Committee (FOMC) meeting, up from a 62% chance last Friday. Last week, the first theoretical 100% of a rate hike was at the March 2027 FOMC meeting.

Market breadth on the S&P 500 index (SPX) has been falling behind the rise in the index (see "Market Breadth" section below), but perhaps there are some signs that the rally might broaden from here. One such sign is today's breakout to fresh all-time highs in the S&P Equal Weight Index (SPXEW). The SPXEW was around 8,300 at the start of the Iran war and subsequently underperformed the SPX as money flowed primarily towards the AI infrastructure tech names. When you get a technical breakout to fresh highs, ideally (if you are bullish) you would want to see a long green candle on above-average volume, and so far today it appears that's what is manifesting on the chart.

Near-term technical translation: bullish

Last week I highlighted the software ETF (IGV) and the potential for some mean reversion between chip stocks and software. For the first two days of this week we saw a 6% drawdown (on an intraday basis) on the PHLX Semiconductor Index (SOX) and the IGV is hitting the highest levels since January today. However, the SOX saw subsequent dip buying from Wednesday to today and the index is actually notching fresh all-time highs today. The brief pullback in the SOX took the index down to its 20-day Simple Moving Average (SMA) where support was found. The price action suggests that investors want to own chips stocks on pullbacks, as the AI infrastructure trade continues to hold market appeal. The only potential bearish observation is the deceleration in the Relative Strength Index (RSI) accompanying the climb higher. Regardless, price is king as they say, and fresh all-time highs is a bullish indicator. Is the SOX overbought? Yes, since the SOX is 60% above its 200-day SMA, but near-term the uptrend is still intact.

Near-term technical translation: Moderately bullish

The Bitwise 10 Large Crypto Index is down 3% week over week, with bitcoin down 3% and ether down 5% at the time of writing this on Friday. Following the rebound in the crypto market from the February lows, bitcoin digital asset treasury (DAT) companies may be starting to attract investor attention given low mNAV (enterprise value-to-net asset value) multiples. These firms often trade as levered proxies to their underlying crypto holdings.

Looking at other assets that are considered levered bitcoin proxies leads us to dogecoin—the largest memecoin by market cap. Dogecoin has an inflationary supply, minting one million new tokens every day. DATs also have inflationary share supply. Historically, during bull markets when their underlying crypto holdings appreciated, DAT mNAV multiples expanded. This resulted in DATs being valued at a premium to their net asset value. DAT management teams have often taken advantage of this by issuing new shares to acquire more crypto on their balance sheets.
 
Dogecoin's 90-day correlation to bitcoin has generally been over 0.60 since 2022, except for 2023 when it briefly fell to 0.40. Since 2024 it has been over 0.80. Using Strategy (MSTR), as a proxy for bitcoin DATs, it has historically exhibited a correlation to bitcoin of more than 0.60 going all the back to 2021 and is currently at 0.91. The difference between bitcoin DATs and dogecoin is that historically, dogecoin has not been able to outperform bitcoin beyond short periods of time. Bitcoin DATs have historically outperformed bitcoin during bull markets while underperforming during bear markets.

Given similar volatility profiles and strong correlations to bitcoin, historically, long exposure to DATs paired with short exposure to dogecoin has been a profitable pair trade—though past performance is no guarantee of future results.

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). In short, market breadth slightly expanded for the S&P 500 but was flat on both the Nasdaq and Russell 2000. Market breadth across all three indices remains well below recent highs, which conveys relatively narrow leadership. Compared to last Friday, the SPX (white line) breadth moved up to 57.60% from 55.40%, while the CCMP (blue line) is flat at 43.76% vs. 43.74%, as was the RUT (red line), which is currently 58.39% from 58.74% (all week-over-week).

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 (132 today): Astera Labs Inc. (ALAB + $13.56 to $311.40), CrowdStrike Holdings Inc. (CRWD + $18.17 to $666.40), Datadog Inc. (DDOG + $2.22 to $220.26), Morgan Stanley (MS + $1.22 to $201.73), Palo Alto Networks Inc. (PANW + $4.04 to $256.96), Valero Energy Corp. (VLO + $3.65 to $244.74)

This Week's Notable 52-week Lows (48 today): Allegion PLC (ALLE - $1.50 to $129.20), Booking Holdings Inc. (BKNG - $0.41 to $159.27), Builders FirstSource (BLDR - $1.44 to $72.42), Chewy Inc. (CHWY + $0.34 to $20.27), Floor & Décor Holdings Inc. (FND - $0.52 to $47.89), International Paper Company (IP + $0.10 to $31.14)