Momentum Monitor: Stocks Pile on Fresh Gains After Thursday's Rocket Ride, But Fresh Inflation Clues Ahead

(Friday Market Open) Talk about a tough act to follow.

Stock index futures propelled yesterday’s market rocket ship even higher this morning following Thursday’s soft October Consumer Price Index (CPI) report.

The SPX hasn’t been at 4,000 since mid-September, but futures came within a few ticks overnight.

Even if the SPX doesn’t get there today, Thursday’s surge to well above 3,900 was technically constructive. It also gave a lift to the Asian markets, particularly in China and Japan.  China’s gains came after Beijing reduced some COVID-19 restrictions.

Whether this early momentum sticks might depend on Treasury yields and the dollar. Both continued sliding early Friday, with the benchmark 10-year Treasury yield (TNX) holding just above 3.8% and the U.S. Dollar Index ($DXY) just above 107. Both represent multi-week lows, taking pressure off Wall Street. One caveat: The dollar’s weakness appeared to give WTI Crude oil futures (/CL) a boost. Crude flirted with $90 per barrel this morning. Great if you’re long the energy sector; not so great if you’re a consumer.

Watch That Pendulum

Overconfidence is a natural reaction after a day like yesterday. Avoid it if you can. The reality is that the market’s traded in a huge range this week, which means some people likely got caught on the wrong side of the pendulum.

The pendulum might offer some swings in the days and weeks to come. One report isn’t going to make the Federal Reserve think its job is done. They’ll want to see a series of reports showing softer inflation. One will arrive next week (see more below).

That said, yesterday’s CPI report really changed the entire mood of the market, evident in the Cboe Volatility Index® (VIX) dropping below 25. We might see similar market progress as long inflation data is softer. But it could be a two-steps forward/one-step back kind of thing with bouts of volatility here and there.

If you have time this weekend, check your portfolio allocation to make sure you’re still comfortable after a week like this. Massive swings can throw things out of balance, and it’s important to stay cautious here.

Lessons from Thursday’s Rally

• How quickly the “crypto contagion” fears dissipated after Wednesday’s sell-off. As we noted at the time, it didn’t seem likely that crypto’s collapse would stretch its tendrils far beyond some of the riskier parts of the market, and Thursday provided evidence. Heck, even bitcoin joined in Thursday’s rally, rising nearly 9%. It was the best day for the SPX since April 2020.
• Though CPI provided most of the juice, you can also credit falling Treasury yields for the better-than-5% rally in the SPX Thursday. It’s not often when you see the benchmark 10-year Treasury yield (TNX) fall more than 30 basis points in a single session. The market has vastly dialed down chances of another 75-basis-point Federal Reserve rate hike next month, putting some vigor back into the Treasury market and pushing down yields, which move the opposite direction of the underlying Treasury contracts.
• It’s possible yesterday’s rally reflected the market being a bit under-invested. TD Ameritrade data from October showed net selling among its clients, a trend that possibly went far wider than just those investors. Then Wednesday’s crypto-related sell-off put more money on the sidelines. So there was cash ready to come in on good news, which it did yesterday.
• The odds are now 80% that we’ll see the Fed hike rates just 50 basis points next month, according to the CME FedWatch Tool. A week ago, CME trading had odds at 50-50 between a 50-point and a 75-point hike.
• Notice how the Nasdaq ($COMP) outperformed the other indexes Thursday? That’s not surprising considering the U.S. 10-year Treasury yield collapsed by more than 30 basis points to finish below 3.83%. Info tech and other growth stocks that are well represented in the $COMP were among the hardest hit by the recent rally in Treasury yields to 4.2% and above, so it figures that those same stocks would get a boost Thursday as yields fell.  
• The thinking behind this is that many growing companies have higher borrowing needs than established companies and would be hurt worse by rising rates. They’re not out of the woods, necessarily, however. The 10-year yield fell to this same level in early October but rebounded quickly amid stronger-than-expected data that raised worries about Fed tightening.

Potential Market Movers

The final major data point this week is due soon after the open in the form of November preliminary University of Michigan Consumer Sentiment at 10 a.m. ET. Analysts expect a headline print of 59.6, down just a smidgen from 59.9 in October, according to research firm Briefing.com. Overall sentiment remains near the lowest levels in more than four decades. The key part of this report, however, is in the data tables. Inflation expectations for the year ahead dipped to 5% from 5.1%. Did it continue to fall in early November? Be on the lookout for that important takeaway.

Thursday was the first time VIX traded under 24 since mid-September. However, VIX contracts out toward next summer continue to trade in an elevated range above the front-month contract. This implies the market isn’t past all its bumps and bruises. 

Still, the market has done a pretty good job weathering recent storms, including a hotter-than-expected October jobs report, another 75-basis-point rate hike, continued hawkishness from Fed officials, and a slowing Chinese economy. Yesterday’s sharp rally had to feel welcome to many investors even as the $COMP remains down 30% year to date. But it also emphasized the market’s recent tendency for knee-jerk reactions to breaking news.

We saw that Wednesday when crypto weakness led to a steep afternoon sell-off and last week when Fed Chairman Jerome Powell sparked heavy afternoon selling after the rate announcement. Such hills and valleys can make it tough for even the most experienced investors to keep their heads. Remember not to trade on emotion, either positive or negative.

Reviewing the Market Minutes

We’ll have what the market’s been having. Here’s how the major indexes performed Thursday:

• The Dow Jones Industrial Average® ($DJI) roared 1,198 points, or 3.69%, to 33,812.21.
• The Nasdaq Composite ($COMP) outdid the $DJI, rising an astonishing 760.97, or 7.35%, to 11,114.15.
• The Russell 2000® (RUT) climbed a more pedestrian 6% to 1,865.93.
• The SPX added 207 points, or 5.53%, to finish at 3,955.88.

It was the highest SPX close since September 12 when it last finished above 4,000. The question is whether momentum left over from Thursday might get it to that level today. One thing that could work against a rally is potential late-week profit-taking. It also wouldn’t be surprising if some investors start selling their losers between now and the New Year to take advantage of so-called “tax-loss harvesting.” That could end up being a bit of a drag on some stocks in coming weeks.

Every S&P sector finished much higher Thursday, led by info tech, real estate, and consumer discretionary. All of those rose 7% or more. The beaten-down communication services sector finished fourth, climbing more than 6%. It got a boost going into Thursday from Meta’s (META) job cut announcement.

Subsectors including semiconductors, casino firms, and cruise lines were among Thursday’s market leaders. Losers? There were a few, including some large food and health insurance companies. Consumer staples was one of the poorest-performing S&P sectors. Staples tends to do better in tough times, which explains why it’s the second best-performing sector over the last year, behind energy. 

CHART OF THE DAY: GOLD VERSUS GREEN. “Gold bugs” appear to see an end to the U.S. dollar’s rise after the latest CPI report. In September, Gold futures (/GC—candlesticks) fell below a support level that has held since 2020, which appeared to be another bad sign for the precious metal. But, like a chain around your neck, it just hung around. Gold made its move earlier this week to counter other commodities selling off. On Thursday, Gold futures surged higher, trading above October highs, which could signal investors believe the dollar’s run might be over—and that they believe the Fed could be near the end of rate hikes. Data source: CME. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Next Big Number—PPI: Though investors were cheered by Thursday’s lower-than-expected October CPI, there’s still next Tuesday’s Producer Price Index (PPI) and Wednesday’s October Retail Sales reports to get through before the holiday. PPI is particularly significant because it’d be ironic if the sigh of relief over CPI turns into stress over a hotter-than-expected PPI. Not that we’re forecasting one, but so many inflation numbers have exceeded expectations recently. The headline PPI number rose 0.4% in September, and core PPI (stripping out food and energy) rose 0.3%. Both exceeded expectations, and headline PPI growth increased from August.

Notably, almost every category in the September PPI report rose from the previous month. The Federal Reserve wants to see those data decelerate, so if Tuesday’s report shows signs of that even in some of the categories, it might be viewed positively by investors. Remember, higher PPI can sometimes translate into higher CPI down the road if companies pass along their own rising costs to consumers.

Average Performance: While people sometimes overestimate the technical importance of moving averages, they’re not totally without meaning. Right now, investors might want to carefully watch the 3,900 level for the SPX. It represents a psychological level of resistance that SPX hasn’t traded above consistently since early September, and it’s also roughly in line with the SPX’s 100-day moving average.

That number stood at 3,901 going into Thursday. Because the SPX dropped below 3,800 on Wednesday and then closed above 3,900 on Thursday, it could be seen as an important bullish chart indication. But if the SPX quickly drops back into the 3,700 to 3,900 range, investors might wave off Thursday’s move as more of a “one timer,” to use an old hockey term. It may be too early to say we can’t retest the October lows. However, a few days of closing above 3,900 could possibly set up a holiday rally that tests further resistance near the summer highs between 4,100 and 4,300, barring some sort of bearish geopolitical or Fed news in the weeks ahead.

Big Boxes Ahead: Next week brings chances for market-moving numbers. It also marks the unofficial start of the big-box retail earnings season. Investors await Q3 reports from companies like Walmart (WMT), Target (TGT), Lowe’s (LOW), and Home Depot (HD) next week, which could provide a better sense of consumer demand moving into holiday shopping season. It also could provide insight into inflation, because if these stores are still struggling with huge inventory backups, they might have to extend discounting. Apparel prices fell in October, according to the CPI report.

Notable Calendar Items

Nov. 14: Expected earnings from Tyson Foods (TSN)

Nov. 15: October Producer Price Index (PPI), November Empire State Manufacturing, and expected earnings from Home Depot (HD) and Walmart (WMT)

Nov. 16: October Retail Sales and Industrial Production, and expected earnings from Lowe’s (LOW) and Target (TGT)

Nov. 17: October Housing Starts and Building Permits, November Philadelphia Fed Index, and expected earnings from Ali Baba (BABA), Kohl’s (KSS), and Macy’s (M)

Nov. 18: October Existing Home Sales and expected earnings from Foot Locker (FL) and JD.com (JD)

Nov. 21: Expected earnings from Dell (DELL) and Zoom Video (ZM)

Nov. 22: Expected earnings from Best Buy (BBY), Autodesk (ADSK), Dick’s Sporting Goods (DKS), Dollar Tree (DLTR), Medtronic (MDT), and Baidu (BIDU)

Nov. 23: November Final University of Michigan Sentiment, October Durable Orders, October New Home Sales, and expected earnings from Deere (DE)

Happy trading and thank you to all who served and continue to serve this country.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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