Weekly Trader's Outlook

If you read last week's blog you might recall that my forecast for this week was "slightly bullish." While the S&P closed at fresh record highs on Tuesday and Wednesday this week and was on track for weekly gains as of yesterday's close, today's pullback puts the SPX on track for a down week, so my forecast was wrong. There were several potential near-term bearish developments that I observed this week so some caution may be warranted for traders. First, bullish momentum took a bearish shift as several of the biggest winners over the past year experienced significant selling pressure this week (APP – 17%, RDDT – 16.9%, CRWD – 7.3%, COST -4.2%, etc.). Next, there were a couple of data points that suggest that the U.S. consumer is pulling back on spending (more on this in the "Economic Data, Rates & the Fed" section below). Another potential cautionary signal is a deteriorating technical backdrop (more on this in the "Technical Take" section below). Throw in a fully valued market that is dealing with a high level of uncertainty regarding fiscal and trade policy and I'm sitting in the cautious camp as we close out this week. Perhaps today's market sell-off on this options expiration Friday is impacting my view, but I'm also mindful that the back half of February has historically been a bearish period for stocks.

At the time of this writing (1:15 p.m. ET), all the major indices are at the lows of the day (DJI - 646, SPX - 81, COMP – 338, RUT – 55), Treasury yields are at the lows of the day (suggesting bond buying) and Volatility Index (VIX) is at the highs of the session. This is classic "risk-off" behavior, though some of today's selling may be exacerbated by February's standard options expiration today. It's possible that markets will shake off today's drop and find some bid support early next week, but I'm in a "show me" stance before dismissing today's bearish price action (i.e. the onus is on the bulls to prove this isn't the start of a larger drawdown). Next week we will also be getting a highly anticipated earnings report from AI-darling NVIDIA on Wednesday. Given the recent "DeepSeek shock" I believe NVIDIA's quarter could be subject to higher investor scrutiny, and potentially larger post-earnings move in the stock, though the options market is currently pegging the implied move at ±9% which isn't out of line with prior quarters. If NVDA can demonstrate that demand for AI chips remains intact, this could provide some bullish support for the overall tech sector. Of course, if guidance is week this could bring the bears out from their caves, so we could be setting up for a binary move. As a result, my overall forecast for next is for "breakout." I define breakout as a 2.0% or greater move, either higher or lower, in the S&P 500 over the next week. If forced to pick a bullish or bearish stance I would lean bearish due to what I outlined in the "Technical Take" section, below. What could challenge my outlook? It's possible we could sell off in the first half of the week and recover due to NVDA results, or vice-versa, which would likely put the SPX within the ±2.0% boundary by next Friday.

Other Potential Market-Moving Catalysts:

Economic:

• Monday (2/24): no reports
• Tuesday (2/25): Consumer Confidence, FHFA Housing Price Index, S&P Case-Shiller Home Price Index
• Wednesday (2/26): EIA Crude Oil Inventories, MBA Mortgage Applications Index, New Home Sales
• Thursday (2/27): Continuing Claims, Durable Goods, EIA Natural Gas Inventories, GDP – Second Estimate, Initial Claims, Pending Home Sales
• Friday (2/28): Advanced International Trade in Goods, Advanced Retail Inventories, Advanced Wholesale Inventories, Chicago PMI, PCE Prices, Personal Income, Personal Spending

Earnings:

• Monday (2/24): Domino's Pizza Inc. (DPZ), Owens Corning (OC), Westlake Corp. (WLK), ONEOK Inc. (OKE), Public Storage (PSA), Realty Income Corp. (O), Diamondback Energy Inc. (FANG), Zoom Communications Inc. (ZM), Hims & Hers Health Inc. (HIMS)
• Tuesday (2/25): Home Depot Inc. (HD), American Tower Corp. (AMT), Bank of Montreal (BMO), Intuit Inc. (INTU), Workday Inc. (WDAY), Coupang Inc. (CPNG), Extra Space Storage Inc. (EXR), Keysight Technologies Inc. (KEYS)
• Wednesday (2/26): Lowe's Companies Inc. (LOW), Anheuser-Busch Inbev SA (BUD), NRG Energy Inc. (NRG), TJX companies Inc. (TJX), NVIDIA Corp. (NVDA), Salesforce Inc. (CRM), Snowflake Inc. (SNOW)
• Thursday (2/27): Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Dell Technologies Inc. (DELL), Autodesk Inc. (ADSK), HP Inc. (HPQ), NetApp Inc. (NTAP)
• Friday (2/28): Chart Industries Inc. (GTLS), Alpha Metallurgical Resources Inc. (AMR), FuboTV Inc. (FUBO), Frontline PLC (FRO)

Markets received a moderate dose of economic data this week, and many of the data points are potentially bearish in my view. I say potentially because I understand that recent data may be negatively influenced by cooler weather, fires, and storms that have hit the U.S. Another ingredient that is likely at play is the impact of potential tariffs and policy reform that is underway. However, I think it's important to be aware that some of the data has been rolling over and we should monitor whether the softness becomes a trend. The service side of the U.S. economy has been robust over the past two years, but the S&P Services Purchasing Managers' Index (PMI) logged its first print in contraction territory in 25 months. Couple this with last Friday's soft Retail Sales report and cautious Walmart guidance yesterday and this tells me that consumer behavior could be undergoing a shift. Here's the breakdown from this week's reports:

• S&P Global US Services PMI: Dropped to 49.7 in February from 52.9 in the prior month and below the 53.0 economists had expected. A figure below 50.0 represents economic contraction and February's 49.7 print represents the first sub 50.0 reading in 25 months.
• S&P Global US Manufacturing PMI: Increased to 51.6 in February from 51.2 in the prior month and slightly above the 51.5 expected. The 51.6 reading represents an 11-month high.
• University of Michigan Consumer Sentiment – Final: Dropped to the lowest reading since November 2023 (64.7) from the prior (preliminary) reading of 67.8 and below the 67.5 expected. This sentiment index is now down 15.9% on a year-over-year basis which represents the steepest decline since late 2022. One-year inflation expectations came in at 4.3% vs. the 4.3% preliminary reading while five-year inflation expectations rose to the highest level since late 2023 (3.5%) versus the 3.3% preliminary reading.
• Federal Open Market Committee (FOMC) Minutes: The committee said they are "well positioned to take time to assess the evolving outlook and the federal funds rate "may not be far above its neutral level." Trade and Immigration were cited as "having the potential to hinder disinflation process".
• NAHB Housing Market Index: Declined five points in February from the prior month to a five-month low of 42 and below the 48 economists had expected (a reading below 50 depicts poor conditions).
• Initial Jobless Claims: Increased to 219K from 214K in the prior week, and above the 217K expected. Continuing Claims increased 19K to 1.869M from last week.
• The Atlanta Fed's GDPNow "nowcast" for Q1 GDP was lowered to +2.3% on February 14th from +2.9%.

Bond yields eased slightly this week. Compared to last Friday, two-year Treasury yields are down nearly 2 basis points to the current 4.243% from 4.261% and 10-year yields are down roughly the same amount, currently 4.455% versus 4.472%.

Near-term expectations around potential rate cuts from the Federal Reserve were little changed week-over-week. Looking at the Bloomberg probabilities, the probability around a March rate remains unchanged at 2% and the first theoretical 100% chance of a 25-basis-point rate cut still stands at the September FOMC meeting. Markets are still expecting somewhere between one to two 25-basis-point cuts in 2025.

The S&P 500 index (SPX) managed to register two new all-time closing highs on Tuesday and Wednesday of this week, but it was more of a crawl to new highs rather than a breakout. With today's ~0.5% pullback it appears the index is falling back into its recent trading range (~5,960-6,120). Assuming the index closes where it is trading at the time of this writing, I view this type of price action as near-term bearish since the SPX is hovering near the upper end of this range and was unable to meaningfully breakout to the upside.
Near-term technical translation: slightly bearish
 

The Russell 2000 index (RUT) is currently down double the percentage of the SPX (-1.50% vs. -0.75%) and is on track to close at a one-month low today, which is bearish price action. Over the past several weeks I've discussed near-term resistance at the 50-day SMA for the RUT and that is illustrated in the aqua line in the chart below. Now it appears the RUT is setting up for a support test at the 200-day SMA where the index found bid support back in early January. Should the index drop to that moving average, if support doesn't hold that would be incrementally bearish but for now, I'm putting the index in the slightly bearish camp.
Near-term technical translation: slightly bearish

The U.S. Securities and Exchange Commission (SEC) acknowledged filings from the Cboe BZX Exchange to list spot XRP exchange traded funds (ETF) from asset managers 21Shares and Bitwise earlier this week. While this only marks the beginning of the SEC's formal review process, which allows 21 days for public comments on the proposals, it is viewed as a sign of progress within the crypto community. Back in 2020 the SEC sued Ripple for issuing the XRP token without first registering the "security" with the agency. However, last year a U.S. judge ruled that the XRP token is not inherently a security but may qualify as one under certain circumstances. XRP was first launched in 2012 on the Ripple network and is used to facilitate transactions between businesses, financial institutions and other organizations.

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 slight losses, but market breadth diverged a bit as the SPX expanded while the CCMP and RTY contracted. On a week-over-week basis, the SPX (white line) breadth moved up to 62.60% from 60.80%, the CCMP (blue line) ticked down to 46.44% versus 47.48%, and the the RTY (red line) edged down to 50.03% from 53.49%.

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 (88 today): CrowdStrike Holdings Inc. (CRWD - $14.90 to $421.23), Deere & Company (DE - $1.48 to $494.30), Gilead Sciences Inc. (GILD + $0.52 to $110.55), JPMorgan Chase & Company (JPM + $1.91 to $268.71), Penumbra Inc. (PEN - $1.65 to $301.46), Visa Inc. (V + $1.73 to $352.22)

This Week's Notable 52-week Lows (83 today): Abercrombie & Fitch Inc. (ANF - $1.10 to $102.04), Alpha Metallurgical Resources Inc. (AMR - $2.29 to $158.87), Celanese Corp. (CE + $0.11 to $52.72), D.R. Horton (DHI - $1.45 to $127.23), Lennar Corp. (LEN - $1.39 to $121.30), Vail Resorts Inc. (MTN + $1.18 to $159.84)