Both countries face a prolonged slowdown in inflation reports. January consumer price and producer price indices were higher than expected..
The first is the Consumer Price Index (CPI), with the headline figure increasing 3.1% in January. This compares to expectations of a 2.9% increase. More recently, the annual pace for the key indicator over the six-month period rose to 3.7%..
Meanwhile, the Producer Price Index (PPI) was only 0.9% lower in the headline figure compared to last year. but Core index rose 2.0% It was higher than the expected 1.8%. The chart below shows key measures year-over-year for both CPI (red line) and PPI (blue line).
With continued strong jobs figures, The inflation report is further delaying the timing of the first rate cut. by the Federal Reserve Bank. At the start of the year, market implied odds were for a rate cut as early as next month.
The first cut will be postponed to June, and the 0.25% interest rate cut will be reduced to four times in 2024. (Table below) At the beginning of this year, there were as many as six.
As the interest rate outlook grew more cloudy, the S&P 500 ended the week lower after several volatile sessions. This is the first weekly decline since early January..
Regardless of S&P’s reaction to the inflation report, I noted that the recent expansion in momentum is increasing the risk that the index will see a mean-reversion move.
but Despite the decline in price performance for the S&P, movements in other sectors of the market have proven encouraging..
Last week I discussed how a key medium-term indicator of momentum in the S&P 500 is expanding. The likelihood of a mean reversion move lower in the index increases..
That doesn’t mean the bull market has run its course. fairly, A partial retracement of gains or a sideways trading period (time correction) will help consolidate gains and set the stage higher for the next leg..
The chart below is a weekly chart of the S&P 500 since the end of 2022 along with the MACD indicator. you can see it The post-2023 upturn has been seen in two distinct waves: from March to July and from October to present.. Each wave was followed by a MACD reset at the zero line and the MACD extended once again.
When things are going well, it’s easy to fall into a feeling of complacency. However, note that the S&P 500 has averaged seven 3% declines and three 5% declines per year since 1950. The second half of February is generally less seasonal, as you can see below..
There’s no telling what will ultimately happen to S&P in the near term. I believe that if this bull market is to continue, it is important for the average stock to keep up with the major indexes..
So despite the S&P’s small decline last week and signs of increasing momentum, Recent movements in small-cap stocks are quite encouraging..
Last week, I wrote about the growing signs among technical momentum indicators that small-cap performance is recovering. I also mentioned the method. The clear upward trend in small-cap growth stocks has seen some strong trading conditions over the past decade..
That’s why the actions of the IWO Small Growth Exchange Traded Fund (ETF) last week were noteworthy. With large-cap stocks looking exhausted after hitting record highs, IWO is trying to clear a key obstacle. In the weekly chart below.
IWO’s weekly chart shows the price breaking out of the $257 level. This is an important resistance for the candlestick on the chart. at the same time, The weekly MACD is just rising from the 0 line, indicating that upward momentum may be in its early stages..
Now a break above the $265 level will be key. An ongoing rotation into small caps will create more trading opportunities internally, even when large cap indexes are weak..
ultimately, This rise in the stock price will also depend on a continued recovery in the company’s performance.. That’s why it’s encouraging to see more signs of a recovery in the rate of economic change.
As seen in BofA’s Global Wave indicator below. The metrics are: It consists of consumer confidence, earnings revisions, etc. and has recently been shifting higher from the 50 baseline..
This is consistent with other indicators I’ve shared recently, such as the Purchasing Managers’ Index (PMI). The rate of change in leading economic indicators is improving from a low level.. This also follows the Atlanta Fed’s first quarter GDP estimate of 2.9%. If economic growth can maintain or accelerate this pace, it bodes well for the earnings outlook..
We would also like to seek confirmation from small cap stocks, which account for more than 90% of the country’s economic revenue. Another reason why developments outside the range mentioned above provide great clues about the outlook..
ultimately, Once the Federal Reserve begins cutting interest rates, the direction of stocks will depend on whether the economy avoids a recession. As you can see below. At this point, I still maintain that the message coming out of the stock market is a positive one about the outlook..
for example, The recent price movements and settings of steel stocks are noteworthy.. The SLX Steel ETF recently hit a new all-time high in an ascending triangle with resistance near the $70 level. Price has now retested that resistance level as support and moved higher.
We are also watching the breakout setup being developed at Steel Dynamics (STLD). The stock has been making a series of rising lows within the pattern since May of last year, and passed the resistance level at $110 last December. The stock is currently testing the next level near $130, which could push it to a new all-time high.
That’s all for this week. One of the stock market’s most extended leaders reports earnings this week: Nvidia (NVDA). As the company’s chips accelerate the deployment of artificial intelligence (AI) hardware, investors will be watching its stock price react after earnings. but It is the continued action of small-cap stocks that we believe will be most important to the overall outlook of the economy and stock markets..
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Disclaimer: This is not a recommendation, just my thoughts and opinions. Do your own due diligence! I may have a position in the securities mentioned in this report.