Weekly Trader's Outlook

If you read last week's blog you might recall that my forecast for this week "Breakout," which I defined as a greater than 2.0% move in the S&P 500 (SPX), either higher or lower, by today. At the time of this writing the SPX is up 5.0% on the week, so my forecast turned out to be accurate. As I anticipated, the highly anticipated trade discussions between U.S. Treasury Secretary and China last weekend translated into a bit of a binary move for this past Monday. Fortunately for the bulls, the trade discussions were constructive as both the U.S. and China agreed to drop reciprocal tariffs from 125% to 10% for 90-days while they negotiate trade details. Monday's "gap-up" also placed the SPX and the NDX above their respective 200-day Simple Moving Averages, so the bulls received a technical win as well (more on this in "Technical Take" section below). I think a lot of this week's rally in stocks not only had to do with incrementally bullish trade and technical developments, but also underexposure of risk assets by fund managers along with some short covering. On the economic front, markets also received cooler-than-expected monthly inflation reports, though consumer sentiment data, also known as "soft data," remains depressed (more on this in the "Economic Data, Rates & the Fed" section below). While the fundamental backdrop appears to be improving for stocks, and the recent rally in stocks reflects that, there is still a high level of uncertainty surrounding tariffs and trade (remember that the high tariff rates are under a period of pause, so we don't know where they will ultimately land, and we don't know what the economic impact will be), and valuation is historically high (SPX forward P/E = 22). High market valuation doesn't suggest a near-term correction, or valuation re-set, is imminent, but it's important to keep it in mind since it does matter over the long haul.

At the time of this writing (1:50 p.m. ET), stocks are modestly higher across the board and near session highs (DJI + 231, SPX + 28, COMP + 56, RUT + 16), as the bulls maintain recent momentum to close out the week. The S&P 500 is on track for a +5% weekly gain while the Nasdaq 100 is looking to tack on a hefty +6.5%. Are we near-term overbought? Yes, but that doesn't mean market can't continue to push higher. With China trade on a 90-day pause, the next important trade milestone for the U.S. in my view is whether they can come to terms with the European Union (EU). According to recent Reuters reports, negotiations have taken place this week between the U.S. and the EU but apparently the EU is not in a hurry to agree to anything and wants a better deal than the U.K. or China. Additionally, the EU has previously stated that they have reciprocal countermeasures in place in the event they are unable to come to terms with the U.S. on trade. Next week there isn't a lot of economic data hitting the tape, so price action will still likely be dictated by any potential trade headlines. From a technical perspective we are a bit stretched to the upside, but that has been the case for the past couple weeks (more on this in the "Technical Take" section below). It can be risky to go against the recent bullish trend but following a big up week past today's standard options expiration, I think the odds are that we finally get some healthy consolidation next week. Therefore, my forecast for next week is "Slightly Bearish." The global trade picture has certainly improved over the past month, but markets have rallied as if everything trade-related has been resolved. What could challenge my outlook? In short, a continuation of bullish momentum.

Other Potential Market-Moving Catalysts:

Economic:

• Monday (5/19): Leading Indicators
• Tuesday (5/20): no reports
• Wednesday (5/21): EIA Crude Oil Inventories, MBA Mortgage Applications Index
• Thursday (5/22): Continuing Claims, EIA Natural Gas Inventories, Existing Home Sales, Initial Claims
• Friday (5/23): New Home Sales

Earnings:

• Monday (5/19): Target Hospitality Corp. (TH), Trip.com Group (TCOM)
• Tuesday (5/20): Home Depot (HD), Viking Holdings Ltd. (VIK), Eagle Materials Inc. (EXP), GDS Holdings Ltd. (GDS), Palo Alto Networks Inc. (PANW), Keysight Technologies Inc. (KEYS), Toll Brothers Inc. (TOL)
• Wednesday (5/21): TJX Companies Inc. (TJX), Lowe's Companies Inc. (LOW), Medtronic PLC (MDT), Target Corp. (TGT), Baidu Inc. (BIDU), Snowflake Inc. (SNOW), Zoom Communications Inc. (ZM), Urban Outfitters Inc. (URBN)
• Thursday (5/22): Analog Devices Inc. (ADI), Ralph Lauren Corp. (RL), BJ's Wholesale Club Holdings Inc. (BJ), Intuit Inc. (INTU), Workday Inc. (WDAY), Autodesk Inc. (ADSK), Ross Stores Inc. (ROST), Deckers Outdoor Corp. (DECK)
• Friday (5/23): Booz Allen Hamilton Holding Corp. (BAH), Buckle Inc. (BKE)

There was a moderate dose of economic reports this week, highlighted by the monthly inflation reports. Perhaps surprisingly, given the recent tariff announcements, the inflation data came in cooler than expected. Also surprising, Treasury yields didn't drop on the benign inflation reports, which I provide some context around below. Lastly, consumer sentiment data remains poor, while inflation expectations remain elevated. Here's the breakdown from this week's reports:

• Consumer Price Index (CPI): Headline increased 0.2% on a month-over-month (MoM) basis (below the +0.3% expected); Headline year-over-year (YoY) increased 2.3%, a step down from the 2.4% YoY print in the prior month and below the +2.4% expected. Core CPI increased 0.2% MoM (below the +0.3% expected) while Core YoY increased 2.8% (in line with estimates).
• Producer Price Index (PPI): Headline decreased 0.5% on a month-over-month (MoM) basis (below the 0.0% expected); Headline year-over-year (YoY) increased 2.4%, a significant step down from the 3.4% YoY print in the prior month and below the +2.5% expected. Core PPI decreased 0.4% MoM (below the +0.1% expected) while Core YoY increased 3.1% (in line with estimates).
• Retail Sales: Increased 0.1% last month (below the +0.4% expected), putting the year-over-year gain at +5.2%. Core retail sales, which excludes gasoline, building materials and food services, declined 0.2% (below the +0.2% expected), and ties directly into GDP.
• University of Michigan Consumer Sentiment: Fell to 50.8 from 52.2 and below the 53.5 expected. This represents the second lowest reading since 1952. One-year inflation expectations rose to 7.3%, the highest reading since 1981, while five- to 10-year inflation expectations rose to 4.6%, highest reading since 1991.
• Initial Jobless Claims: Was unchanged at 229K versus the prior week, and below the 232K expected. Continuing Claims increased 9K from last week.to 1.881M.
• The Atlanta Fed's GDPNow "nowcast" for Q2 GDP was revised lower to +2.4% today from +2.5% on May 15th.

Treasury yields saw some lift this week, despite the cooler-than-expected monthly inflation reports. In my view, treasury yields are either moving higher because of better long-term growth expectations (perhaps driven by positive trade discussions) or because of heavy upcoming Treasury issuance later this year, or a combination of both. Compared to last Friday, two-year Treasury yields rose ~8 basis points (3.972% vs. 3.889%), 10-year yields moved up ~6 basis points (4.436% vs. 4.375%) and 30-year yields ticked up ~6 basis points (4.896% vs. 4.836%).

Expectations around potential rate cuts from the Federal Reserve continued to ease this week. Per Bloomberg, expectations for a 25-basis-point cut at the June Federal Open Market Committee (FOMC) meeting are down to 5% from 17% and total 2025 rate cuts are down to 2.05 from 2.68 (both on a week-over-week basis). 

Last week the Nasdaq 100 index (NDX) closed just below its 200-day Simple Moving Average and on Monday of this week it gapped up above this indicator on the China/U.S. trade truce and continued to push higher throughout the week. The index is up a staggering ~29% off the April 7th intraday lows and at the highest levels since late February. No doubt significant technical healing has taken place, and the trend is up, but the Relative Strength Index (RSI) has moved above 70 for the first time this year, suggesting that we may be due for some consolidation of recent gains. An RSI above 70 is not necessarily a sell signal, and overbought markets can always get more overbought, but I wouldn't be surprised if mean reversion kicks in soon. It's not uncommon for a stock/index to pullback and test support after gapping above it, in the NDX's case this would be a "throwback" to the 200-day SMA.

Intermediate-term technical translation: cautious/slightly bearish

The technical assessment on the Dow Jones Industrial Average (DJI) is a little more suspect compared to the NDX/SPX. Yes, the DJI is above its 200-day Simple Moving Average today, but it also closed above this indicator on Monday only to pull back below it on Tuesday/Wednesday (UNH drop had an impact no doubt). We also saw a similar "head fake" back in late March (denoted by the red circle in the chart below). Therefore, I'd like to see a couple more closes above the 200-day SMA before declaring that resistance has been transcended.

Near-term technical translation: cautious/slightly bearish

It's been a busy week for cryptocurrency exchange Coinbase Global Inc. (COIN + $21.72 to $266.16). COIN started the week on the upside following news that it will replace Discover Financial Services in the S&P 500 index starting next Monday, but then ran into a couple of negative headlines. First, the company revealed that it has been hit with a cyberattack which compromised account data on a "small subset" of its customers and will need to incur a $180-400M loss as a result. Separately, yesterday a New York Times report surfaced stating that the SEC is investigating whether the company provided inaccurate user numbers in past disclosures. COIN's Chief Legal Officer, Paul Grewal, said the investigation is a hold-over from the prior administration and should be dismissed.

The Bloomberg chart below shows the current percentage of members within the S&P 500 (SPX), Nasdaq Composite (CCMP) and Russell 2000 (RTY) that are trading above their respective 200-day Simple Moving Averages (SMA). In short, stocks had another up week and market breadth correspondingly continued to improve. Market breadth on the SPX is currently at two-month highs. On a week-over-week basis, the SPX (white line) breadth jumped up to 55.40% from 44.40%, the CCMP (blue line) moved up to 35.31% from 29.78%, and the the RTY (red line) expanded to 37.05% versus 28.77%.

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 (56 today): Boeing Co. (BA - $2.48 to $203.76), Carvana Company (CVNA + $0.03 to $297.43), Duolingo Inc. (DUOL + $1.97 to $532.49), MercadoLibre Inc. (MELI + $5.58 to $2,592.07), NRG Energy Inc. (NRG + $0.20 to $155.22), Palantir Technologies Inc. (PLTR + $0.22 to $128.34)

This Week's Notable 52-week Lows (38 today): Conagra Brands Inc. (CAG - $0.08 to $22.70), Endava PLC (DAVA - $0.10 to $14.68), General Mills Inc. (GIS + $0.03 to $54.43), Kraft Heinz Company (KHC - $0.02 to $27.46), Merck & Company (MRK + $0.66 to $75.46), United Health Group Inc. (UNH + $4.29 to $278.50)