Weekly Trader's Outlook

If you read last week's blog you might recall that my outlook for his week was "slightly bullish while acknowledging the potential for some modest consolidation of gains". At the time of this writing the SPX is down less than 1% on the week, so my forecast turned out to be off. However, I did note that if bond yields turn higher this could jeopardize the forecast and that is precisely what happened. Yields on the 10-year (TNX) are up over 20 basis points this week alone, which was driven by hotter-than-expected inflation data (more on this in the "Economic Data, Rates & the Fed" section below). Given the velocity of the move I'm honestly a little surprised that the SPX is not down more this week. Back on November 15th yields on the TNX touched 4.50% and this was met with a two day sell-off in stocks. Currently, we are 12 basis points below that key level so this bears watching in the near-term. This week's relative buoyancy in stocks was assisted by money flow into mega-cap tech stocks – AAPL, AMZN, GOOGL, META and TSLA all hit fresh record highs this week. The recent money flow back into mega-cap is resulting in some market breadth contraction (more on this in the "Market Breadth" section below), but narrow leadership is a familiar theme to market participants over the past several years. In addition to the uptick in inflation there was also a surprise jump in weekly jobless claims (242K vs. 222K est.) but it's likely too early to extrapolate any kind of narrative around what this suggests about the economy. For now, the bull thesis around a strong economy still appears to be intact and is supported by a near-term bullish set-up - bullish seasonality, relatively bullish technicals, along with the potential for year-end performance chasing by money managers.

At the time of this writing (12:15 p.m. ET), the major indices are modestly lower across the board (DJI - 88, SPX - 10, COMP - 39), which appears to be related to a move higher in yields–10-year yields are at the high of the day right now at 4.389%. Also, perhaps we are encountering some buying exhaustion at this point in the post-election rally and need to digest some gains–I touch on this in the "Technical Take" section below. Next week there will be a Federal Open Market Committee (FOMC) meeting which typically has the potential to introduce some market volatility, either higher or lower. While expectations are for a 25-basis-point cut, I'm wondering whether this week's inflation data will influence the Federal Reserve's Summary of Economic Predictions (SEP) or forward guidance. Regardless, I think the potential to use Powell's commentary as an excuse to take some profits is alive and therefore feel a bit cautious next week. Thursday's Jobless Claims also bears watching since that figure has come in above expectations for the second week in a row. Lastly, are bond yields going to continue to move higher next week? If so, this could result in another down week for the S&P 500. Taking it all into consideration, my forecast for next week is "slightly bearish," with expectations for an uptick in volatility. What could challenge my outlook? If bond yields turn lower and/or the Fed sends a relatively dovish message following the FOMC meeting this would likely be bullish for stocks.

Other Potential Market-Moving Catalysts:

Economic:

• Monday (12/16): NY Fed Empire State Manufacturing
• Tuesday (12/17): Business Inventories, Capacity Utilization, Industrial Production, NAHB Housing Market Index, Retail Sales
• Wednesday (12/18): Building Permits, Current Account Balance, EIA Crude Oil Inventories, FOMC Rate Decision, Housing Starts, MBA Mortgage Applications Index
• Thursday (12/19): Continuing Claims, EIA Natural Gas Inventories, Existing Home Sales, GDP – Third Estimate, Initial Claims, Leading Indicators, Net Long-Term TIC Flows
• Friday (12/20): PCE Prices, PCE Prices – Core, Personal Income, Personal Spending, University of Michigan Consumer Sentiment

Earnings:

• Monday (12/16): Compass Minerals International (CMP), Mitek Systems Inc. (MITK)
• Tuesday (12/17): HEICO Corp. (HEI), Worthington Enterprises Inc. (WOR)
• Wednesday (12/18): General Mills Inc. (GIS), Jabil Inc. (JBL), Birkenstock Holding PLC (BIRK), Micron Technology (MU), Lennar Corp. (LEN), Worthington Steel Inc. (WS)
• Thursday (12/19): Accenture PLC (ACN), Cintas Corp. (CTAS), Paychex Inc. (PAYX), Darden Restaurants Inc. (DRI), Carmax Inc. (KMX), Conagra Brands Inc. (CAG), Nike Inc. (NKE), FedEx Corp. (FDX)
• Friday (12/20): Winnebago Industries Inc. (WGO)

We received some interesting economic data points this week which was highlighted by the monthly CPI and PPI reports. CPI was essentially an "in-line" report, but the PPI was definitively hotter than expected. We also saw a surprise jump in weekly Jobless Claims and a figure that has come in above economist's expectations for the second week in a row. On a positive note, the NFIB Small Business Optimism registered a notable jump to the highest reading since 2021, helped by the election results. Here's the breakdown from this week's reports:

• NFIB Small Business Optimism Index: rose by eight points to 101.7, representing the highest reading since June of 2021. Business owners became more certain following the election which contributed to the jump.
• Consumer Price Index (CPI): Month-over-month (MoM) headline and core reading increased 0.3% (both in-line with estimates). The 0.3% increase followed four straight months of +0.2% gains and represents the biggest jump since April. Headline year-over-year (YoY) came in at +2.7% while Core YoY was +3.3% (both in-line with estimates).
• Producer Price Index (PPI): MoM headline increased 0.4% (above the 0.2% expected) while core reading was +0.2% (in-line with estimates). Headline year-over-year (YoY) came in at +3.0% which was the biggest YoY increase since February 2023. PPI core YoY was +3.4% (above the +3.2% expected).
• Initial Jobless Claims: 242K, up 17K from the prior week, and above the 222K expected. Continuing Claims increased to 1.886M from 1.871M last week.
• The Atlanta Fed's GDPNow "nowcast" for Q4 remained at 3.3%, unchanged from the most recent revisions (3.2% to 3.3%) on December 5th.

U.S. Treasury yields turned higher this week, which appeared to be driven by both the jump in the NFIB index and the hotter-than-expected PPI report. Compared to last Friday, two-year Treasury yields are up ~12 basis points to 4.226% from 4.10% while 10-year yields pushed higher by over 20 basis points to the current 4.367% from 4.151%.

Expectations around a potential rate cut at the December 17th-18th FOMC meeting ticked up this week, primarily driven by in-line CPI data and an unexpected jump in Jobless Claims. Currently, Bloomberg probabilities are suggesting an 96% chance at that meeting versus 85% last Friday. Looking further out in time, probabilities are suggesting a total of 75 basis points of cuts between now and the end of 2025 versus roughly 175 basis points of cuts back in late September.

The Nasdaq Composite (COMP) notched a fresh intraday all-time high of 20,061 earlier in the session but has pulled back modestly at the time of this writing. The mid-day weakness may be due in part to higher yields (10-year up 5 basis points), but it also could be that the bulls need to take a bit of rest after an impressive run. This is conveyed in my view by the Relative Strength Index (RSI) which is having trouble holding ground above the 70 level. While the longer-term uptrend is firmly intact, near-term we may need to consolidate. Near-term technical translation: slightly bearish

While the Russell 2000 (RUT) technically hit a fresh all-time high back on November 25th, the recent "rollover" is likely tied to the resurgence in bond yields. The index looks like it is setting up for a re-test of recent support at the 50-day Simple Moving Average (SMA). The RUT bulls would like to see some stabilization in the face of rising yields, and if the 50-day SMA can provide that it would be an encouraging sign. Regardless, technically the uptrend is still intact, but the near-term fate is likely to be influenced by the trajectory of yields. Near-term technical translation: neutral to slightly bearish

The Bloomberg chart below shows the current % 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. The S&P 500 and Russell 2000 are slightly lower on the week, but the Nasdaq Composite is at fresh all-time highs today and market breadth contracted a bit. I believe that one of contributing factors is the money flow that has found its way back into mega-cap tech. Presumably that money came from selling other areas of the market which could be negatively impacting breadth. On a week-over-week basis, the SPX (white line) breadth dropped to 68% from 73%, the CCMP (blue line) ticked up to 49% versus 48%, and the RTY (red line) eased to 62% from 63%.

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 (23 today): Alphabet Inc. (GOOGL - $0.56 to $191.40), Apple Inc. (AAPL + $1.00 to $248.96), Costco Wholesale Inc. (COST - $7.95 to $980.44), Decker's Outdoor Corp. (DECK + $1.52 to $205.20), Meta Platforms Inc. (META - $1.21 to $629.58), ServiceNow Inc. (NOW - $8.90 to $1,139.52)

This Week's Notable 52-week Lows (85 today): Anaptysbio Inc. (ANAB + $0.54 to $15.56), Ashland Inc. (ASH - $0.57 to $73.55), Baxter International Inc. (BAX - $0.45 to $30.39), Canadian National Railway (CNI + $0.23 to $104.90), CVS Corp. (CVS - $0.90 to $48.68), Polaris Inc. (PII - $0.85 to $63.79)