Weekly Trader's Outlook

If you read the last week's blog, you might recall that my forecast for this week was "Higher Volatility," citing several potential market-moving catalysts. While the S&P 500 (SPX) and Nasdaq Composite ($COMP) are on track to be flat to slightly up on the week, that doesn't capture the intra-week volatility that markets encountered. Both indices rallied for the first half of the week, then gave it all back during the back half of the week. The Cboe Volatility index (VIX) ramped up and nearly hit 20 on an intraday basis yesterday, following a post-earnings tech-fueled sell-off. Several key tech earnings reports were one of the main drivers for the uptick in volatility–Meta Platforms rallied nearly 10% while Microsoft nearly declined the same amount; ServiceNow was hit with a 10% post-earnings haircut, despite posting a "beat and raise" quarter and announcing a new share buyback program; memory and storage-related stocks such as SanDisk, Seagate, and Western Digital, rallied on stellar results and guidance. More than 90 of the S&P 500 companies reported earnings this week, and the results continued to convey a healthy economy. Out of the 165 S&P 500 companies that have reported results, 60% have beat on the top line while 79% have beat on the bottom line. Revenue growth has been +7.43% year-over-year while earnings-per-share (EPS) growth is tracking at 15.31%, though we are only one-third of the way through the earnings season. For reference, FactSet is currently forecasting 8.2% EPS growth in Q4 for the entire S&P 500.

Elsewhere, the Federal Reserve conducted one of its two-day Federal Open Market Committee (FOMC) meetings this week, though it really didn't contain any surprises. As expected, rates were left unchanged, and Chairman Jerome Powell conveyed that monetary policy remains near an appropriate level given the firm economy. Of course, their view is subject to change based on future data. Earlier this morning, U.S. President Donald Trump announced that he has nominated Kevin Warsh as the next Fed chair, though he will need to be formally nominated and confirmed by the Senate before securing the seat. Warsh was appointed by President George W. Bush as Fed governor from 2006-2011 and is considered a Wall Street veteran due to his time at Morgan Stanley. Last year Warsh warned that U.S. fiscal policy was on a "dangerous trajectory" due to "irresponsible spending" and called for "regime change" at the Federal Reserve. Analysts have characterized Warsh as a practical pick who is less dovish than some of the other candidates, though he may be in favor of some near-term cuts.

In other economic news, there were several crosscurrents in this week's batch of data. The monthly wholesale inflation report (producer price index, or PPI) came in hot, consumer confidence dropped to a 10-year low, and the Chicago Purchasing Managers' Index (PMI) moved into expansionary territory for the first time in over two years (more on this in the "Economic Data, Rates & the Fed" section below).

At the time of this writing (1:40 p.m. ET) stocks are lower across the board and near the lows of the session (DJI - 500, SPX - 60, $COMP - 284, RUT - 51). I would characterize the price action over the last two days as a firm "risk off" shift in sentiment–the tech sector has been hit with heavy selling (outside of a few pockets), bitcoin is below $83K and silver is currently down 30%. The only two sectors higher today are consumer staples and health care, which are classic defensive plays. This type of speculative deleveraging could be a short-term phenomenon, but it does create some near-term technical damage so healing could take time. Next week we'll get the monthly jobs report, along with several key earnings reports (such as GOOGL, AMZN, AMD, PLTR, etc.), so elevated volatility will likely persist. Given the higher frequency of potential catalysts, and news flow for that matter, it becomes difficult to predict how next week will play out. Given the bearish lean on the near-term technical set-up (more on this in the "Technical Take" section below), along with a potential government shutdown, I'm providing an overall "Moderately Bearish" forecast for next week. I also expect there to be a lot of earnings-driven intra-week volatility that could generate a lot of sector/industry divergence underneath the surface of the index levels. What could challenge my forecast? It's possible that the selling pressure over the past two days was enough to work off the speculative excess and stocks recover and end the week higher.

• Monday (Feb. 2): Construction Spending, ISM Manufacturing Index
• Tuesday (Feb. 3): no reports
• Wednesday (Feb. 4): ADP Employment Change, Business Inventories, EIA Crude Oil Inventories, Factory Orders, ISM Non-Manufacturing Index, MBA Mortgage Applications Index
• Thursday (Feb. 5): Continuing Claims, EIA Natural Gas Inventories, Initial Claims, Productivity – Preliminary, Unit Labor Costs-Preliminary
• Friday (Feb. 6): Average Hourly Earnings, Average Workweek, Consumer Credit, Nonfarm Payrolls, Unemployment Rate, University of Michigan Consumer Sentiment - Preliminary
   

• Monday (Feb. 2): Alliance Resources Partners LP (ARLP), Aptiv PLC (APTV), Fabrinet (FN), Hess Midstream LP (HESM), IDEXX Laboratories Inc. (IDXX), NXP Semiconductors NV (NXPI), Palantir Technologies Inc. (PLTR), Simon Property Group (SPG), Tyson Foods Inc. (TSN), Walt Disney Co. (DIS)
• Tuesday (Feb. 3): Advanced Micro Devices Inc. (AMD), Amgen Inc. (AMGN), Chipotle Mexican Grill (CMG), Chubb Ltd. (CB), Eaton Corporation PLC (ETN), Emerson Electric Co. (EMR), Illinois Tool Works Inc. (ITW), Merck & Co. (MRK), Mondelez International Inc. (MDLZ), PepsiCo Inc. (PEP), Pfizer Inc. (PFE), TransDigm Group Inc. (TDG)
• Wednesday (Feb. 4): Abbvie Inc. (ABBV), Aflac Inc. (AFL), Allstate Corp. (ALL), Alphabet Inc. (GOOGL), Arm Holdings PLC (ARM), Eli Lilly Co. (LLY), Mckesson Corp. (MCK), Novartis AG (NVS), Novo Nordisk A/S (NVO), O'Reilly Automotive Inc. (ORLY), Qualcomm Inc. (QCOM)
• Thursday (Feb. 5): Amazon.com (AMZN), Banco Bilbao Vizcaya Argentaria SA (BBVA), Barrick Mining Corp. (B), Bloomer Energy Corp. (BE), Bristol-Myers Squibb Co. (BMY), ConocoPhillips (COP), Digital Realty Trust Inc. (DLR), Fortinet Inc. (FTNT), Linde PLC (LIN), Monolithic Power Systems Inc. (MPWR), Roblox Corp. (RBLX), Shell PLC (SHEL), Strategy Inc. (MSTR)
• Friday (Feb. 6): AerCap Holdings NV (AER), Biogen Inc. (BIIB), Centene Corp. (CNC), Cboe Global Markets Inc. (CBOE), nVent Electric PLC (NVT), Philip Morris International Inc. (PM), Toyota Motor Corp. (TM), Ubiquiti Inc. (UI)

There was a large batch of economic data for investors to digest this week, which included an FOMC meeting and the monthly PPI report. I'd characterize the Fed meeting and its message to the markets as slightly hawkish (meaning monetary policy remains roughly appropriate at current levels), but this morning's Kevin Warsh announcement as Fed chair is slightly dovish. Regarding inflation, the PPI came in hotter than expected, which suggests sticky inflation could continue to persist. Elsewhere, while hard economic data remains robust (such as this week's Durable Orders report), consumer confidence dropped to a decade low this month. Lastly, manufacturing in the Chicago region jumped into expansionary territory for the first time in two years. Here's a breakdown of the reports:

• FOMC Rate Decision: As expected, the Federal Reserve held the fed funds rate unchanged in the 3.50-3.75% range. There were two dissents, Christopher Waller and Stephen Miran, who favored a 25-basis-point cut. In the Fed's statement, economic growth was described as expanding at a "solid pace" vs. "moderate pace" in the prior statement, and the unemployment rate was described as having "shown some signs of stabilization."
• Producer Price Index (PPI): Headline wholesale inflation for final demand increased 0.5% in December, which was above the + 0.2% reading in the prior month and + 0.2% economists had expected. On an annual basis, headline PPI is up 3.0%, above the + 2.7% expected.
• Producer Price Index (PPI) - Core: Wholesale inflation, excluding food and energy prices, was up 0.7% in December, versus 0.0% in November and above the + 0.2% economists had expected. On an annual basis, core PPI increased to 3.3% from 3.1% in November and above the + 2.9% expected.
• Durable Orders: Rose 5.3% in November to $323.79B, which was above the 3.1% economists had expected; New Orders increased 12.3% year-over-year (YoY).
• Durable Goods – ex transportation: Rose 0.5%, which was in line with the +0.5% estimate.
• Consumer Confidence: Fell 9.7 points from the prior month to 84.5 in January, which was below the 91.0 economists had expected. This represents the lowest reading since May of 2014.
• Factory Orders: +2.7% vs. +0.4% expected.
• Productivity – Revised: Nonfarm productivity grew at an annualized rate of 4.9% in January.
• Unit Labor Costs: Declined 1.9%, which was in line with estimates.
• Initial Jobless Claims: Initial applications for U.S. jobless benefits decreased 1K from last week's upwardly revised 210K to 200K, which was above the 202K economists had expected. Continuing Claims fell 38K to 1.85M from 1.865M week-over-week.
• Chicago PMI: The Chicago business barometer jumped to 54.0 in January, which is the first time the index has been in expansionary territory since November 2023. Economists were expecting a reading of 43.3.
• EIA Crude Oil Inventories: -2.30M barrels.
• EIA Natural Gas Inventories: -242 bcf.
• The Atlanta Fed's GDPNow "nowcast" for Q4 GDP was revised down to 4.2% from 5.4% on January 26th, driven by downward revisions in the nowcast of PCE growth (from 3.2% to 3.1%) and the contribution of net exports to Q4 GDP growth (from 1.88% to 0.65%).

U.S. Treasury yield curve saw some steepening this week, which was influenced by the FOMC meeting and this morning's announcement that Trump has nominated Kevin Warsh as the next Fed chairman. Compared to last Friday, two2-year Treasury yields are down ~6 basis points (3.539% vs. 3.605%), 10-year yields are slightly higher (4.247% vs. 4.239%), while 30-year yields are higher by ~5 basis points (4.881% vs. 4.832%).

Market expectations for rate cuts from the Federal Reserve in 2026 ticked up versus last Friday, in part due to a relatively dovish FOMC meeting, then in response to the Warsh announcement. Per Bloomberg, the probability of a 25-basis-point cut from the Fed in March is essentially unchanged at 16%, April is up slightly to 34% from 32%, and June is up to 84% from 74%.

There has been a rotation back into tech over the past week, likely in anticipation of this week's earnings reports from mega-cap tech. In fact, the Nasdaq 100 (NDX) hit the highest levels since November ahead of after the bell earnings from META, MSFT, and TSLA. However, the index was hit with some post-earnings selling pressure yesterday in several prominent names, like MSFT and NOW, which dragged on overall tech sentiment. From a very near-term bullish technical perspective the NDX bounced off its 50-day SMA intraday yesterday (the gold arrow in the chart below), but selling has re-emerged today which makes the near-term outlook less clear. If the index continues to pullback and eventually tests the 100-day SMA like it did mid-month, this is likely a net bearish sign due to the higher frequency of support tests. Honestly, I need more data to get a betterer picture of the near-term technical outlook, so I'll assign a neutral to cautious view for now.

Near-term technical translation: neutral to cautious

Last week I had a "moderately bearish" near-term technical outlook on the Russell 2000 (RUT), noting the overbought reading on the Relative Strength Indicator (RSI). The RUT is on track to be down 2.2% on the week and the RSI has dropped to a sub-50 reading, in part driven by a partial un-wind of the "rotation trade" that has been underway this month. If money flows back into non-tech areas of the market, the RUT could benefit and turn back higher, but otherwise I'm still maintaining a cautious near-term technical outlook on the index, given this week's bearish crossover in the MACD.

Near-term technical translation: cautious

Bitcoin has been under pressure this week which may have resulted from a combination of rising odds of a government shutdown and the announcement of the next Federal Reserve chair. During last year's 36-day government shutdown, bitcoin fell 10% from start to finish. That said, in the middle of the shutdown, there was a large deleveraging which ultimately brought the crypto market lower over the next month. The deleveraging was likely tariff related, not shutdown related. Fed liquidity can have an impact on bitcoin's price in the short term, and a government shutdown may impact one aspect of it—flows out of the treasury general account (TGA). As the TGA is spent down through government purchases and government payrolls, the money is then recycled throughout the economy. This time around, a shutdown could be less impactful as the crypto market does not appear as stretched in terms of positioning across derivatives, on-chain activity, and spot trading activity. Also, the Federal Reserve has begun to expand its balance sheet again, whereas it was still actively conducting quantitative tightening in the fall. A government shutdown could push the passing of the Clarity Act further out in 2026. After clawing back some losses throughout the week, bitcoin fell to the low $80,000s on Thursday following large cap tech earnings and rising odds of Kevin Warsh as the new Fed chair.

The Bloomberg chart below shows the current percentage of members within the S&P 500 (SPX), and Nasdaq Composite (CCMP) that are trading above their respective 200-day Simple Moving Averages (SMA). In short, both the S&P 500 and Nasdaq Composite are on track to be slightly higher on the week, but market breadth has contracted. This is primarily due to the influence of mega-cap tech performance post earnings. Compared to last Friday's, the SPX (white line) breadth declined to 67.27% from 69.28% and the CCMP (blue line) dropped to 48.51% from 52.94% (note: RUT is excluded from this week's chart due to data inaccuracies).

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 (95 today): Applied Materials Corp. (AMAT - $6.43 to $334.91), Bloom Energy Corp. (BE + $2.20 to $158.71), Cameco Corp. (CCJ - $6.27 to $127.40), Johnson & Johnson (JNJ - $1.17 to $226.12), Lam Research Corp. (LRCX - $4.70 to $243.63), Micron Technology (MU + $7.70 to $443.49)

This Week's Notable 52-week Lows (134 today): Abbott Laboratories Inc. (ABT + $0.27 to $106.36), Cable One Inc. (CABO + $1.67 to $77.32), Flutter Entertainment PLC (FLUT - $5.61 to $163.11), Humana Inc. (HUM - $0.84 to $195.83), Paycom Software Inc. (PAYC - $0.71 to $133.63), Tyler Technologies Inc. (TYL - $6.68 to $373.32)