Bulls Run: Market Up 20% From Fall Low, but Rally Faces Test Next Week From Fed, Inflation Data

Bulls Run: Market Up 20% From Fall Low, but Rally Faces Test Next Week From Fed, Inflation Data

Key Takeaways

    Broader market on pace for fourth-straight positive week for first time since last August

    Major data week ahead includes May consumer and producer prices, retail sales

    Market still prices in a likely Fed rate pause next week followed by a hike in July

(Friday market open) After a dry-as-dust data calendar the last few days, next week offers a data deluge which, along with a Federal Reserve meeting, could possibly shake the market out of its recent torpor.

Yesterday actually showed some zip as the S&P 500® Index (SPX) posted its highest close of the year at just above 4,293—up 20% from the closing low last October 12 and technically the start of a new bull market. The 282-day bear market that just ended was much longer than the previous one, which lasted only 33 days in February and March of 2020.

The SPX is on pace for its fourth-straight positive week—something it hasn’t accomplished since last August. Buckle up starting Tuesday for key inflation and retail sales reports.

Morning rush

    The 10-year Treasury note yield (TNX) rose 3 basis points to 3.75%.The U.S. Dollar Index ($DXY) is barely changed at 103.39.The Cboe Volatility Index® (VIX) futures inched up to 13.67, still near three-year lows.WTI Crude Oil (/CL) is higher at $71.62 per barrel.

The VIX reached its lowest levels since just before COVID-19, and a soft VIX usually suggests smaller daily moves in the SPX. The current VIX level points to daily SPX moves of only 30 points or so, though that’s not carved in stone. For much of January 2020, the VIX traded near the current levels between 12 and 13. The SPX closed December 2019 at 3,230 and ended January 2020 at 3,225. That’s an average daily move of less than one point.

Eye on the Fed

Chances of a pause to interest rate hikes at next week’s Federal Open Market Committee (FOMC) meeting stand at 72% this morning, according to the CME FedWatch tool, which also prices in a 66% chance that rates will rise by July. These numbers haven’t moved much the last few days, reinforcing ideas that a pause is likely next week despite the rate increases issued earlier this week by the central banks of Canada and Australia.

The FOMC meeting starts on Tuesday—the same day as the release of the May Consumer Price Index (CPI) report. The Fed will announce its rate decision next Wednesday afternoon.

What to Watch

Just ahead: Next week makes up in multitudes for the empty calendar investors just slept through. There’s a troika of critical data points starting Tuesday and wrapping up Thursday, including the CPI, the May Producer Price Index (PPI) and May Retail Sales. Both CPI and PPI hit the tape before the FOMC meeting ends, so it’s possible they could influence the Fed’s decision.

As a reminder, both CPI and core CPI (which strips out food and energy) rose 0.4% in April, above the level the Fed likely wants to see to push annual inflation toward the central bank’s 2% goal. Rising shelter costs and used car and truck prices helped swell April price growth. Still, the annual inflation rate of 4.9% in April was the lowest in two years.

Consensus among analysts for Tuesday’s May CPI is 0.3% for headline inflation and 0.4% for core, according to Trading Economics. Year-over-year CPI is seen dropping to 4.7%.

Talking technicals: Now that the SPX is back in bull territory, it faces psychological resistance at 4,300, a level it’s been unable to stay above on recent intraday rallies. It’s also edging toward last summer’s 4,325 high, which roughly marks a 61.8% retracement of the downturn from January 2022 to October 2022—an important Fibonacci level if you follow that technical feature. A “wedge” pattern has developed on the SPX charts, which is typically a bearish signal.

Stocks in the Spotlight

Supercharged: Tesla is (TSLA) sizzling this morning. Shares reached a seven-month high after the company announced on Thursday a new partnership with General Motors (GM). Under the agreement, General Motors electric vehicles will be able to use Tesla’s charging network. Shares of Tesla rose more than 4% yesterday and another 6% in premarket trading today. They’re up 45% since the start of May but remain well below the all-time high above $400 reached in late 2021.

Cloud corner: Monday afternoon features earnings from Oracle (ORCL), which delivered mixed results its previous time out. The software company saw shares drop 5% immediately after reporting fiscal Q3 revenue that missed analysts’ expectations in March, but the stock forged back since. The cloud was a sunny spot for Oracle then, as both cloud services and cloud infrastructure posted solid growth.

Like with Cisco (CSCO), which reported a few weeks ago, it makes sense to watch Oracle as a proxy for corporate spending on tech. Its business touches many applications globally, especially the cloud. Oracle CEO Safra Catz said in the March earnings call that the company had a “great” quarter, arguably a step back from the “outstanding” she used to describe fiscal Q2.

Monthly snapshot: Get Schwab Chief Investment Strategist Liz Ann Sonders’ perspective on the U.S. stock market and economy in this monthly Market Snapshot video.

Bulls Run: Market Up 20% From Fall Low, but Rally Faces Test Next Week From Fed, Inflation Data

CHART OF THE DAY: BEAR TRACKS. The S&P 500 (SPX-candlesticks) is in a “wedge” pattern on the charts, typically viewed as bearish by technical analysts. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Dress to impress: The negative response Campbell (CPB) received after earnings earlier this week potentially offers investors a preview of the Q2 earnings season approaching next month. Just beating expectations by a bit may not satisfy Wall Street; it might take much better-than-expected results to move the needle. This goes along with what research firm FactSet found from studying market reaction to Q1 earnings: Investors rewarded positive earnings surprises less than usual. Companies that reported positive earnings surprises in Q1 saw their shares rise an average of 0.4% from two days before the earnings release to two days after, FactSet notes. That’s well below the five-year average of 1%, suggesting many stocks are “priced for perfection” with the market scraping nine-month highs. If the trend continues, it might take a monster Q2 earnings season to get major stock market indexes into an earnings-based rally. Right now, analysts anticipate year-over-year Q2 earnings to fall 6.4%, FactSet reports, and the S&P 500®Index (SPX) is already trading at a price-earnings (P/E) ratio above historical averages.

Love and marriage: Many companies talk about “customer engagement,” but when Signet Jewelers (SIG) mentions engagement, it’s talking about a crucial business metric over which it has no control. “As we predicted, there were fewer engagements in the quarter, resulting from COVID’s disruption of dating three years ago,” CEO Gina Drosos said on the company’s earnings call yesterday. The company says couples typically wait about three years after meeting to marry, so you can do the math. Those getting engaged, Drosos added, are buying lower-priced rings because of economic concerns. The company expects engagements to bounce back soon, but shares fell 10% during parts of Thursday’s session as investors digested a guidance slice. Other sectors could also be hurt by this slow walk to the altar. They include airlines (fewer weddings to fly to) and hotels (many have facilities for celebrations). There were nearly 2 million U.S. marriages last year, government data shows, and CNN reports that the average wedding cost $29,000. That’s nearly $60 billion a year, not including the rings. It’s a big industry.

Perspective on new bull: While the SPX is up smartly from the October lows, nearly one-third of its stocks remain in bear market territory, down more than 20% from their highs, notes Liz Ann Sonders, Schwab’s chief investment strategist. Having the largest few stocks dominate performance, as we’ve seen this year, isn’t uncommon. But when the remaining stocks underperform, near-term risks grow elevated, she notes. On a positive note, more SPX stocks are now trading above their 52-week averages than was the case just a few days ago, a sign that market “internals” are improving. Retail and consumer discretionary stocks led gains on Thursday among SPX sectors, while technology stocks were also strong.  Small-cap stocks eased, but the Russell 2000® (RUT) is still up 2.7% for the week. Volume yesterday was below average as the market rallied, raising questions about how much conviction was behind the runup. Decliners actually led advancers on the New York Stock Exchange on Thursday.

Calendar

June 12: Expected earnings from Oracle (ORCL).

June 13: May Consumer Price Index (CPI), beginning of FOMC’s two-day meeting.

June 14: FOMC rate decision and May Producer Price Index (PPI).

June 15: May Retail Sales, May Industrial Production, June Empire State Manufacturing, and expected earnings from Kroger (KR).

June 16: Preliminary June University of Michigan Consumer Sentiment.

Happy trading,                                  

Alex

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