Weekly Preview / May 15
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Monday:
Empire State Manufacturing Index (-3.75 exp.)
Tuesday:
Retail Sales MoM (0.7% exp.)
Wednesday:
EU Inflation (April)
Thursday:
Initial / Continuing Jobless Claims
Friday:
Fed Chair Powell Speech
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Monday:
N/A
Tuesday:
Home Depot HD
Keysight Technologies KEYS
Baidu BIDU
Wednesday:
Cisco Systems CSCO
Take-Two Interactive Software TTWO
Wix.com WIX
Thursday:
Walmart WMT
Alibaba Group Holding BABA
Applied Materials AMAT
Canada Goose GOOS
Farfetch FTCH
Nio NIO
Nutanix NTNX
Ross Stores ROST
Friday:
Deere DE
Foot Locker FL
The Grind Continues
Last week, SPY moved 0.23% from Monday’s open to Friday’s close. The total trading range was about 1.1%, and the overall impression is that we have nothing to comment on, from a price action perspective, despite there being a huge “event” when inflation was reported. This week, the economic and earnings calendar is light, with Thursday and Friday offering up potential catalysts in Powell’s speech and earnings from Walmart, AliBaba and Applied Materials.
In our daily briefing we wrote:
The April Consumer Price Index (CPI) received a mixed response from market participants; upon closer analysis, it generated doubts regarding the Federal Reserve's policy trajectory. Despite a decrease from 5.0% in March, the yearly increase in total CPI was 4.9%, marking the first sub-5.0% reading observed in the last two years; The Core-CPI, which excludes food and energy, experienced a yearly increase of 5.5% in April, which is a slight decrease from the 5.6% observed in March; these figures should keep the Fed from hiking interest rates further, but there is no evidence in the data that argues for a “pivot” just yet;
In conclusion, inflation continues to decline, and trend toward the long-term 2% target. There was a substantial contraction in the differential between CPI and PPI, however.
This contraction may be viewed as either bullish or bearish. Optimistically, these downturns have coincided with market bottoms. This is due to the expectation that decreased inflation will stimulate increased consumer expenditure, and boost companies bottom lines.
On the other hand, the recent collapse has bearish implications as well. Companies may struggle with passing on higher costs, leading to a continued decline in net profit margins.
SPY Analysis
The MACD Signal is slowly grinding lower, not showing any clear break
The market continues to be under pressure, with participants lacking the conviction to push the main indices in either direction. For SPY, short term resistance is placed at $416.5 and support at $403. The MACD Signal remains in SELL mode, suggesting increased caution is warranted for the time being.
Our overall interpretation is that the absence of bad news (a clear breakdown below $403) is good news. Sometimes, more bearish periods in markets coincide with prices trending in a sideways manner, not necessarily correcting spectacularly.
The riskiest bets on the market - high beta non profitable tech - does not show any signs of a rally. Instead, it’s clear that money is flowing to the largest capitalisation and most liquid companies. This is not an exuberant, risk-taking environment, similar to January or August 2022.
Tepid volumes, low volatility
As seen in our Market Internals / Volume instrument, dollar transaction volume and volatility have fallen below average. While the main indices are grinding higher, near recent highs, the bulk of stocks have trended lower.
Takeaway
The market is struggling with a tight trading range, but support levels at the index level are holding. While internals are not particularly encouraging, there seems to be a lack of follow through in terms of selling pressure. There are plenty of bearish headlines to spook investors into a more defensive stance, yet the market is holding up fine, for now.
We see this as a correction process that has turned into consolidation. Upside appears limited for now, but we won’t get too defensive for the time being.
We’ll keep you in the loop with our trading in the Sigma Portfolio, and continue the analysis in Wednesday’s Portfolio Rebalancing article.