Weekly Trader's Outlook

If you read the last week's blog, you might recall that my forecast for this week was "Moderately Bullish", citing a potential capitulation bottom in software & crypto, but my forecast turned out to be wrong. While the S&P 500 Equal Weight technically notched a fresh all-time high yesterday, all of the other major indices are on track for weekly losses. Most of this week's selling pressure came from increased concerns around AI disruption, and it wasn't just focused on software. The selling spilled over into real estate, trucking/logistics and wealth management stocks. Earlier this week, wealth management Altruist launched an AI-enabled tax planning tool. Online platform Insurify released an AI-powered comparison tool on ChatGPT that allows users to compare car insurance rates. On Thursday, AI firm Algorhythm Holdings developed a tool called SemiCab, which the firm deemed as "the world's most well-orchestrated transportation platform". The net result of these AI headlines was a "sell first, ask questions later" reaction by investors. What's interesting is that the economy has been strong, and stocks have been hitting all-time highs due in large part to the massive spending on the buildout of AI infrastructure. Now AI is viewed as a potential threat to existing business models, so it's both a Wall Street blessing and a curse. Perhaps this is just an overreaction by investors, another "DeepSeek moment" which will lend to an eventual recovery in these areas of the market. However, it's likely going to take some time before we will know just how disruptive AI will be to these legacy businesses.

Aside from the AI disruption concerns, the monthly jobs report was strong, this morning's inflation data was cooler than expected, and Treasury yields dropped across the curve this week (more on this in the "Economic Data, Rates & the Fed" section below). Regarding the Q4 earnings scorecard, out of the 369 S&P 500 companies that have reported results, 66% have beat on the top line while 76% have beat on the bottom line. Revenue growth has been +8.94% year-over-year while EPS growth is tracking at 12.24%.

At the time of this writing (3:10 PM ET) stocks are higher across the board, but well off the highs of the session (DJI + 100, SPX + 15, $COMP + 11, RUT + 35). Given this morning's encouraging inflation data, falling Treasury yields (10-year yields are down to 4.05% today), I'd describe today's price action as poor. Typically, the significant drop in Treasury yields would be a bullish catalyst for stocks, but all of the majors are on track for weekly losses. I'm also concerned about the technical snapshot, particularly in the Nasdaq Composite ($COMP) and Nasdaq 100 (NDX). It appears that we got a bearish confirmation in the $COMP/NDX this week, which tells me that markets may be susceptible to more near-term downside (more on this in the "Technical Take" section below). While the rotation/broadening trade has helped the SPXEW & DJI, I'm not sure how sustainable it will be if tech does not recover. Lastly, the VIX is still hovering around 20, which signals that protection is being sought after and/or the potential for higher near-term volatility is above average. Taking all of these factors into consideration, I'm providing an overall "Moderately Bearish" forecast for next week. What could challenge my forecast? The bright spot on the technical front is the S&P is trying to bounce off the bottom of its trading range, so if it can sustain a larger bounce next week this could help lift sentiment and lead to an up week for stocks.

• Monday (2/16): no reports
• Tuesday (2/17): Empire State Manufacturing
• Wednesday (2/18): Building Permits, Capacity Utilization, Export Prices ex-ag, Housing Starts, Import Prices, Industrial Production, MBA Mortgage Applications Index, Net Long-Term TIC Flow
• Thursday (2/19): Continuing Claims, EIA Crude Oil Inventories, EIA Natural Gas Inventories, Initial Claims, Pending Home Sales, Philadelphia Fed Index
• Friday (2/20): Chain Deflator, Q4 GDP – Advanced, PCE Prices, Personal Income, Personal Spending, University of Michigan Consumer Sentiment - Final
   

• Monday (2/16): Omnicom Group Inc. (OMC), Otter Tail Corp. (OTTR), Renew Energy Global PLC (RNW), Sonoco Products Co. (SON)
• Tuesday (2/17): Amrize AG (AMRZ), Cadence Design Systems Inc. (CDNS), Constellation Energy Corp. (CEG), Energy Transfer LP (ET), EQT Corp. (EQT), FirstEnergy Corp. (FE), Medtronic PLC (MDT), Palo Alto Networks Inc. (PANW), Vulcan Materials Co. (VMC)
• Wednesday (2/18): Analog Devices Inc. (ADI), Booking Holdings Inc. (BKNG), Carvana Co. (CVNA), Clean Harbors (CLH), CRH PLC (CRH), DoorDash Inc. (DASH), eBay Inc. (EBAY), Garmin Ltd. (GRMN), Global Payments Inc. (GPN), Insulet Corp. (PODD), Moody's Corp. (MCO), Occidental Petroleum (OXY), Verisk Analytics Inc. (VRSK)
• Thursday (2/19): Alliant Energy Corp. (LNT), Cenovus Energy Inc. (CVE), CenterPoint Energy Inc. (CNP), Comfort Systems Inc. (FIX), Copart Inc. (CPRT), Deere & Co. (DE), Extra Space Storage Inc. (EXR), Gold Fields Ltd. (GFI), Live Nation Entertainment Inc. (LYV), Newmont Corporation (NEM), Quanta Services Inc. (PWR), Southern Co. (SO), Targa Resources Corp. (TRGP), Walmart Inc. (WMT)
• Friday (2/20): Anglogold Ashanti PLC (AU), Balchem Corp. (BCPC), Hudbay Minerals Inc. (HBM), Lamar Advertising Co. (LAMR), PPL Corp. (PPL), Sibanya Stillwater Ltd. (SBSW), Vipshop Holdings Ltd. (VIPS)

There was a healthy dose of economic data for investors to digest this week, and it was a bit of mixed bag. First, the monthly retail sales report was weak, but it follows a string of strong readings, so it's just one data point and not necessarily a trend. Next, the monthly jobs report delivered payroll gains well above estimates along with a tick down in the Unemployment Rate. Also noteworthy is a relatively benign inflation reading from this morning's monthly Consumer Price Index (CPI) report. The net result has been lower rate cut expectations and lower yields. Here's a breakdown of the reports:

• Nonfarm Payrolls: Nonfarm payrolls increased 130,000 in January, which was well above the 65,000 economists had expected. There were only slight downward revisions to the prior two months (-2K in December and -15K in November). The report puts the three-month average of job gains at +73K, which is the highest since January 2025.
• Unemployment Rate: Ticked down to 4.3% from 4.4% in December, which was 0.1% below expectations.
• Average Hourly Earnings: Increased 0.4% versus the 0.3% expected.
• Employment Cost Index: 0.7% vs. 0.7% est.
• Retail Sales: Were flat (0.0%) in December, which was down from 0.6% in the prior month and below the +0.4% economists were expecting. Retail sales ex-autos was also flat and below the +0.3% expected. The Control Group, which excludes volatile categories such as gasoline, automobiles and building materials, was down 0.1% versus expectations for a 0.4% increase. On a YoY basis, retail sales increased 2.1%, down from 3.33% in the prior reading.
• Consumer Price Index (CPI): Headline month-over-month (MoM) increased 0.2% (below the 0.3% expected), putting the year-over-year (YoY) gain at 2.4% (below the 2.5% expected).
• Consumer Price Index – Core: Excluding food and energy, headline MoM increased 0.3% (in-line with estimates), which translates into a YoY gain of 2.5% (also in-line with estimates). The 2.5% YoY gain represents the lowest reading since April 2021.
• NFIB Small Business Optimism: Fell 0.2 points in January to 99.3.
• Initial Jobless Claims: Initial applications for US jobless benefits fell by 5K from last week's to 227K, which was above the 225K economists had expected. Continuing Claims rose 21K from the prior week to a seasonally adjusted 1.862M.
• University of Michigan Consumer Sentiment: Rose to 57.3 in February from 56.4 in January, which was above the 55.0 estimate. One-year inflation expectations sank to 3.5% from 4.0% in the prior month, while longer-term inflation expectations edged up to 3.4% from 3.3%.
• EIA Crude Oil Inventories: +8.53M barrels.
• EIA Natural Gas Inventories: -249 bcf.
• The Atlanta Fed's GDPNow "nowcast" for Q4 GDP was revised down to 3.7% from 4.2% last week.

U.S. Treasury yield curve flattened some this week, primarily driven by the steeper drops at the long end of the curve. Today's cooler-than-expected inflation data is certainly a factor and yields on the 2-year are essentially down to the lowest levels since 2022. Compared to last Friday, 2-year Treasury yields are lower by ~8 basis points (3.414% vs. 3.495%), 10-year yields are down ~14 basis points (4.06% vs. 4.206%), and 30-year yields are lower by ~15 basis points (4.70% vs. 4.855%).

Market expectations for rate cuts from the Federal Reserve in 2026 moved lower this week, primarily driven by the better-than-expected Nonfarm Payrolls report. Per Bloomberg, the probability of a 25 basis point cut from the Fed in March moved down to 10% from 20%, April eased to 30% from 38%, while June currently stands at 85% from 97%.m 74%.

Last week I had a cautious technical assessment on the Nasdaq 100 (NDX), noting the breach of support at the 100-day Simple Moving Average (SMA). I also said we should be on watch for a "bearish pullback", and it looks like we got one this week. A bearish pullback is when the underlying (the NDX in this case) falls through support, rallies back to the underside of that support level, and then reverses lower. You may have heard the technical saying "prior support becomes resistance", and this appears to be what occurred this week. The bullish perspective would note that the index is bouncing today and has not yet made a lower low from the initial drop (around 24,500). Therefore, it's possible that the index could make another run up the 100-day SMA and get back above it next week, but until then the technical view is near-term bearish.

Near-term technical translation: bearish

While the S&P 500 Equal-Weight (SPXEW) notched a fresh all-time high yesterday, the technical view of the market-cap weighted S&P 500 index (SPX) is a different picture. Over the past two months the SPX appears to be rangebound between 6,800 and 7,000. The good news is that the SPX appears to be bouncing off the lower end of this range today, which coincides with the 100-day Simple Moving Average (SMA). The bearish perspective would highlight that there is a higher frequency of support tests at this lower band, which could eventually lead to a break. For now, the bounce off support is near-term bullish, but I would be concerned if the index continues to test this support level, which could lead to an eventual breach to the downside.

Near-term technical translation: slightly bullish, provided 6,800 support holds up

Cryptocurrencies had a relatively stable week. After initially selling off following the strong jobs report as markets repriced rate cut expectations, crypto has rallied at the time of writing this on Friday, following the soft CPI report. Bitcoin has recently found support near its 200-week moving average, which has historically been a level where bear markets have bottomed. Technically, a retest of this level is not uncommon, and the 100-week moving average near $87,000 may serve as the new level of resistance. Bitcoin's next difficulty adjustment is expected to occur on February 20th and may see an upward adjustment. Historically this has served as confirmation of a bottom following a selloff. In recent weeks, some investors have incorrectly attributed bitcoin's weakness to the market discounting quantum risk. Encryption risk is the major risk for all cryptocurrencies, and historically all encryptions have been cracked at some point. The potential risk from quantum computing doesn't appear to be a near-term issue, and resources have been committed towards developing a "quantum proof" solution. Earlier this week, a Bitcoin Improvement Proposal (the formal process for submitting a recommended change to the blockchain), was submitted that introduced a new method to support quantum-resistant functionality.

The Bloomberg chart below shows the current % of members within the S&P 500 (SPX), Nasdaq Composite (CCMP) & Russell 2000 (RTY) that are trading above their respective 200-day Simple Moving Averages (SMA). In short, stocks are on track to be lower this week, but market breadth didn't suffer. In fact, market breadth on the S&P 500 moved higher. Compared to last Friday's, the SPX (white line) breadth moved up to 66.20% from 63.44% and the CCMP (blue line) ticked up to 43.45% from 43.05%, while the RUT eased to 62.72% from 63.40%.

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, % 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 (69 today): AstraZeneca PLC (AZN + $1.88 to $206.40), Borgwarner (BWA - $1.13 to $65.42), Caterpillar Inc. (CAT + $21.38 to $779.68), Chevron Corp. (CVX + $0.65 to $183.05), Deere & Company (DE + $5.99 to $604.10), GE Vernova Corp. (GEV - $4.89 to $811.67)

This Week's Notable 52-week Lows (95 today): Accenture PLC (ACN - $0.28 to $221.77), Adobe Systems Inc. (ADBE - $4.00 to $258.50), Docusign Inc. (DOCU + $0.48 to $44.22), Humana Inc. (HUM + $4.39 to $183.22), Salesforce Inc. (CRM + $4.20 to $189.63), Roper Industries Inc. (ROP + $0.42 to $320.24)