Weekly Trader's Outlook

If you read last Friday's blog, you might recall that I had a "breakout" outlook for stocks this week, noting that the S&P 500 Index (SPX) and Philadelphia Semiconductor Index (SOX) were at key intermediate-term support levels, which I felt set them up for an outsized weekly move (either higher or lower). There was a "bounce attempt" in stocks in the first half of this week (the Nasdaq was up 2% on the week by Wednesday's close) but then encountered a strong sell-off on Thursday, with some follow-through selling today. Net-net most of the majors are up or down less than 1% on the week (the Russell 2000 Index, or RUT was the best performer), so my forecast for a "breakout" turned out to be wrong. Today, it feels like we are in a similar set-up, in that several major indices are testing key intermediate-term support levels–the SPX is testing support around 7,600-7,620; the SOX is testing support at its 200-day SMA; the Nasdaq Composite is testing support around 26,000; the Nasdaq 100 is testing support around 29,000 (more on this in the "Technical Take" section below).

The sentiment around tech and the artificial intelligence (AI) complex remains challenged, if not outright bearish, based on the price action. There were several important tech earnings reports this week, from companies such as SpaceX, Meta Platforms, Lam Research, IBM, and Texas Instruments, but the post-earnings reactions have been bearish, despite mostly strong results. SpaceX for example, delivered a hefty "beat and raise" quarter, and while the stock jumped 8% the following day, it is now trading below where it was prior to the report. We saw similar post-earnings selloffs in semiconductor equipment maker ASML and chip maker Taiwan Semiconductor last week. This just tells me that sentiment continues to be depressed around the AI trade, which appears to have started back on October 8th when the Financial Times reported that September revenue at OpenAI was tracking below analyst estimates (~$50B vs. $70B expected). This caused a subsequent spike in the spread on CoreWeave's five-year credit default swaps (insurance against a default), which are up 39% just in October. Credit default swap spreads on SpaceX, Nvidia, Oracle, and Meta have also seen a substantial rise over the past couple weeks, which is contributing to the negative sentiment around AI. Next week we'll get quarterly results from Alphabet, Amazon and Microsoft, so perhaps they can help address some of the recent concerns around heavy AI spending and longer-term ROI forecasts.

Lastly, global bond yields remain front and center for investors, as do oil prices (Brent crude hit the highest levels since May this week), and there was some volatility this week. First, yields on France's 10-year bond hit a fresh 24-year high of 5.07% due to social unrest/riots related to the high cost of living and underfunded social programs. In the U.S. however, yields have declined across the curve (particularly on the long end of the curve) as investors have sought "safe haven" assets in response to the concerns around the tech/AI complex.

At the time of this writing (2:15 p.m. ET) all of the majors are lower (DJI - 596, SPX - 32, $COMP - 10, RUT - 10), which in part is due to a midday rise in oil prices (WTI +3.48% to $102.93/barrel, Brent crude + 3.17% to $116.35/barrel). The PHLX Semiconductor Index (SOX) is still higher by 0.80%, which suggests to me that some investors may be dip buying for technical reasons (SOX bounced off is 200-day SMA today) or to position ahead of earnings from three of the hyperscalers next week (AMZN, GOOGL, MSFT). The SPX is also holding ground above key support (7.600-7,620), so there could be some technical support here for the bulls, but there is still cause for concern. The Iran war appears to be escalating, and the uptrend in oil prices is reflecting that. France is deploying 70,000 police officers ahead of weekend protests, which could impact France's bond yields (France's issues are emblematic of what many governments are contending with around the world). While tech/AI is near-term oversold, and sentiment is extremely pessimistic (contrarian indicator?), if intermediate technical support doesn't hold up early next week (see levels identified in the intro), this could result in programed selling based on the technical break-down.

Next week we'll get the monthly Personal Consumption Expenditures (PCE) Prices report, which has the potential to introduce some market volatility (recall: Consumer Price Index, or CPI and Producer Price Index, or PPI were warm/hot), and of course there will be a Federal Open Market Committee (FOMC) meeting (a surprise is always possible, but expectations for a rate hike are very low) but the key driver will likely be the earnings reports from Alphabet, Amazon, and Microsoft on Wednesday/Thursday. Last quarter all three of these companies showed acceleration in AI adoption/cloud services growth, so investors will likely want to see more signs of traction. Additionally, capital expenditures (CapEx) guidance is important for the AI trade, but at this point I'm not sure what investors want to see–higher CapEx guidance suggests that the AI secular growth story is intact and excess demand for compute persists, but META sold off post-earnings which in part was driven by the company's plans to "continue investing aggressively" in 2027. Providing a forecast with all these potential catalysts is difficult, so I'm just going to provide a "higher volatility" forecast for next week. I feel the bid support at the 200-day SMA in the SOX today is encouraging, and chips stocks could be ready to put in a meaningful bounce, but other potential headwinds exist, so a volatile week for stocks seems the most likely outcome. What could challenge my outlook? Lower oil prices and bond yields, a benign PCE report "not too hot, not too cold" CapEx guidance from the hyperscalers could all result in weekly gains for stocks, and help being the VIX down from its current level of 20.

• Monday (Oct. 26): no reports
• Tuesday (Oct. 27): Consumer Confidence, Durable Orders, FHFA Housing Price Index, New Home Sales, S&P Case-Shiller Home Price Index
• Wednesday (Oct. 28): Advanced International Trade in Goods, Advanced Retail Inventories, EIA Crude Oil Inventories, Federal Open Market Committee (FOMC) Meeting, MBA Mortgage Applications Index
• Thursday (Oct. 29): Chain Deflator – Advanced, Continuing Claims, EIA Natural Gas Inventories, GDP (Q3) – Advanced, Initial Claims, PCE Prices, Personal Income, Personal Spending
• Friday (Oct. 30): Chicago PMI, Employment Cost Index

• Monday (Oct. 19): Alliance Resource Partners LP (ARLP), Cadence Design Systems Inc. (CDNS), Celestica Inc. (CLS), Cemex S.A.B. de C.V. (CX), Nucor Corporation (NUE), Public Storage (PSA), The Hartford Insurance Group (HIG), Welltower Inc. (WELL)
• Tuesday (Oct. 20): Baker Hughes Company (BKR), Boeing Co. (BA), Coca-Cola Co. (KO), Corning Inc. (GLW), Freeport McMoRan Inc. (FCX), HCA Healthcare Inc. (HCA), Johnson Controls International PLC (JCI), Novartis AG (NVS), NXPI Semiconductors NV (NXPI), Robinhood Markets Inc. (HOOD), Seagate Technology Holdings PLC (STX), Teradyne Inc. (TER), Visa Inc. (V), Waste Management Inc. (WM)
• Wednesday (Oct. 21): Agnico-Eagle Mines Ltd. (AEM), Alphabet Inc. (GOOGL), Amphenol Corp. (APH), Automatic Data Processing (ADP), Equinix Inc. (EQIX), Fortinet Inc. (FTNT), GE Vernova Inc. (GEV), GSK PLC (GSK), KLA Corporation (KLAC), Microsoft Corporation (MSFT), Phillips 66 (PSX), ServiceNow Inc. (NOW), T-Mobile US Inc. (TMUS), Vertiv Holdings Co. (VRT)
• Thursday (Oct. 22): Altria Group Inc. (MO), Amazon.com Inc. (AMZN), Anheuser-Busch Inbev SA (BUD), Bristol-Myers Squibb Company (BMY), Caterpillar Inc. (CAT), Eli Lilly and Company (LLY), Gilead Sciences Inc. (GILD), Intel Corp. (INTC), Mastercard Inc. (MA), Merck & Co. Inc. (MRK), SanDisk Corporation (SNDK), Starbucks Corp. (SBUX), Stryker Corp. (SYK), Shell PLC (SHEL)
• Friday (Oct. 23): AbbVie Inc. (ABBV), BP PLC (BP), Banco de Chile (BCH), Chevron Corp. (CVX), Colgate-Palmolive Company (CL), Exxonmobil Holdings Corp. (XOM), General Dynamics Corp. (GD), Natwest Group PLC (NWG), Regeneron Pharmaceuticals Inc. (REGN), Sanofi SA (SNY)

There was a relatively small batch of economic data this week, which was highlighted by this morning's PMI reports from S&P Global. The good news is that both manufacturing and services remain near four to five-year highs. The bad news is that inflation continues to manifest in both reports as prices remain near four-year highs. Elsewhere, this week's housing and consumer sentiment data remained weak. Here's a breakdown of the reports:

• S&P Global U.S. Manufacturing PMI: This manufacturing index ticked up to 56.0 in October from 55.9 in September, which represents the highest reading since May of 2022. Manufacturer's selling prices rose at a pace not seen since July 2022.
• S&P Global U.S. Services PMI: This services index eased to 57.9 in October from 58.8 in the prior month but remains near five-year highs. Services inflation edged up to the highest level since August 2022.
• University of Michigan Consumer Sentiment – Final: The final value for this index was revised slightly higher to 48.0 from the preliminary estimate of 46.3 but remains at a five-month low. Year-ahead inflation expectations edged up to 4.7% in October from 4.6% in September. Long-run (five-year) inflation expectations also ticked higher, rising from 3.4% in September to 3.5%.
• NAHB Housing Market Index: Fell three points in October from the prior month to 29, which represents the lowest level of U.S. homebuilder confidence since June 2012.
• Pending Home Sales: Pending home sales index tumbled 7.3% to 66.0 last month, which represents the lowest level since the series started in 2001. Economists were expecting a much subtler -0.5% drop.
• Building Permits: 1.4M vs. 1.4M est.
• Housing Starts: 1.221M vs. 1.3M est.
• Leading Economic Index (LEI): 0.0% vs. 0.1%.
• EIA Crude Oil Inventories: -3.061M barrels.
• EIA Natural Gas Inventories: +77 bcf.
• Initial Jobless Claims: Initial applications for U.S. jobless benefits dropped 6K from last week to 194K, which was below the 200K economists were expecting. Continuing Claims rose by 25K from the prior week to a seasonally adjusted 1.728M.
• The Atlanta Fed's GDPNow initial "nowcast" for Q3 GDP was revised down slightly to 3.50% yesterday from 3.57% last Friday.

U.S. Treasury yields on the long end of the curve saw meaningful drops across the yield curve which appears to be driven by a perceived "safety trade" among investors since concerns persist around the AI complex. French 10-year yields hit a fresh cycle high this week (5.07%), which is likely softening demand for European debt, which then funnels money flow over to U.S. Treasuries.  Compared to last Friday, two-year Treasury yields are down ~3 basis points (4.701% vs. 4.736%), 10-year yields decreased ~10 basis points (4.999% vs. 5.098%) while 30-year yields dropped ~12 basis points (5.318% vs. 5.437%).

Market expectations around potential rate hikes from the Federal Reserve eased this week. Per Bloomberg, market participants were putting a 17% probability of a Fed rate hike at the October FOMC last Friday, which is now down to 10%. Market participants may be expecting a pause at the October meeting due to the closeness to the midterm elections. Longer term, market expectations are for 2.66 25-basis-point cuts between now and December 2027, down from 2.98 last Friday. The decline in longer-term expectations may be due to economic growth concerns.

The S&P 500 Index (SPX) is on track to be down roughly 0.30% on the week, and earlier today the index "tested" potential support around the 7,600-7,620 area. The SPX has already moved below potential support at the 50-day SMA (the gold line in the chart), so this potential area of support appears to be technically important, at least on a very near-term basis. The index closed below 7,600 over the past two months to be clear (like it did back on September 16th), but only for a day or two. What's interesting to note is that the SPX testing this support area today is coinciding with the Nasdaq Composite ($COMP) testing its own intermediate-term support at 26,000 and the Nasdaq 100 (NDX) testing its intermediate-term support at 26,000. This suggests that the near-term trajectory of tech stocks is technically important for the SPX and next week we'll get earnings reports from three "Mag 7" names (AMZN, GOOGL, MSFT), which should drive investor sentiment around the tech sector next week.

Near-term technical translation: slightly bullish (since 7,600-7,620 area appears to be providing some support)

Last week, I noted that the Relative Strength Index (RSI) on the PHLX Semiconductor index (SOX) was at a level (~32) where it bounced back in July and that a near-term oversold bounce could occur. The SOX saw a minor bounce in the first half of this week but then gave way to a near 8% drop yesterday. Yesterday's sell-off took the index below a key intermediate-term support level at 11,000 and it closed just above the 200-day Simple Moving Average (SMA) around 10,690. The good news for the bulls is that the SOX is finding some bid support today, which suggests that the 200-day SMA may hold up as support. It's too early to say for sure, but next week we'll hear from the hyperscalers and if CapEx guidance is strong, this could potentially provide a fundamental catalyst for the bulls.

Near-term technical translation: moderately bullish (oversold bounce potential)

The Bitwise 10 Large Crypto Index is unchanged since last Friday, with bitcoin and ether also unchanged at the time of writing. Narratives have historically played an important role in crypto market cycles, from DeFi and monetary inflation in 2020/2021 to institutional adoption in 2024/2025. Following the latest bear market, however, a similarly dominant theme has yet to emerge. Identifying an emerging narrative before it becomes widely recognized may provide investors with another framework for evaluating which areas of the crypto market could benefit, as well as which could be left behind.

Earlier in the week, J.P. Morgan brought its dollar-backed deposit token to the public Ethereum Mainnet for institutional clients. Globally, financial institutions continue to explore tokenization and move traditional financial activity on-chain, but that development has not yet translated into a broader market narrative. One reason may simply be price action. In crypto, rising prices can validate an emerging narrative, attracting additional attention and capital, which can further reinforce prices. This dynamic is often referred to as reflexivity.

While blockchain data can be helpful in determining which chains are capturing tokenization, tokenized assets are still minuscule compared with global financial assets. That means activity from even a single institution could meaningfully change the perceived answer to the question of which blockchain is the tokenization leader. As of today, there are approximately $33 billion in tokenized real-world assets on blockchains, with the majority on Ethereum, according to data from Allium. This measure excludes DeFi yield strategies, which involve taking a tokenized asset and generating additional yield on it through a DeFi protocol. These strategies would represent an additional $12 billion, according to data from Token Terminal. Including these DeFi yield strategies brings the total value of RWAs to nearly $47 billion, with nearly $38 billion on Ethereum (including L2s).

Given the relatively low value of tokenized assets today, another way to assess blockchain adoption is to look at the number of large financial institutions currently using, or planning to use, each blockchain. An analysis of comments, releases, and news updates from 90 large financial institutions reinforces Ethereum's leading position. However, Solana also emerges as a strong contender. That said, institution count does not necessarily reflect assets or transaction activity on each blockchain, and announced projects or pilots may not ultimately reach commercial scale.

Recently, Robinhood launched its own blockchain on Arbitrum (an Ethereum L2), resulting in increased activity on Uniswap. Uniswap is the largest decentralized exchange on the Ethereum blockchain. Crypto investors have often focused on finding "the next big cryptocurrency," but the next cycle's Merry Men may already be hiding in plain sight. Following where financial institutions are building may therefore help identify which blockchain ecosystems are attracting activity and which existing applications could potentially benefit as that activity grows.

Jim Ferraioli, Director of Digital Currencies Research and Strategy, authored this report.

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, the S&P 500 is on track for a down week, but underneath the surface market breadth showed significant improvement. Market breadth on both the Russell 2000 and Nasdaq Composite indices are still hovering around the lows seen back in late March/early April. Compared to last week, the SPX (white line) breadth moved up to 60.12% from 54.60%, the CCMP (blue line) fell to 36.61% from 36.59%, and the RUT (red line) dropped to 47.98% from 45.87%.

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 (37 today): Apple Inc. (AAPL + $1.51 to $349.73), Berkshire Hathaway – Class B Inc. (BRK/B - $0.36 to $546.61), Cintas Corp. (CTAS + $0.67 to $224.71), Elevance Health Inc. (ELV - $0.78 to $444.50), Hilton Inc. (HLT - $6.74 to $351.33), Visa Inc. (V - $2.37 to $411.97)

This Week's Notable 52-week Lows (138 today): AeroVironment Inc. (AVAV - $3.73 to $113.97), Baidu Inc. (BIDU - $0.46 to $77.52), Cal-Maine Foods Inc. (CALM + $0.17 to $64.00), Dycom Industries Inc. (DY - $9.56 to $215.60), Mastec Inc. (MTZ - $7.00 to $164.55), Netflix Inc. (NFLX - $0.18 to $66.86)