Investors Appear Content To Wait For Friday's CPI Data Before Committing

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(Wednesday Market Open) Equity index futures are pointing to a lower open as the market continues to ping-pong ahead of Friday’s anticipated Consumer Price Index (CPI) numbers.  

Potential Market Movers

In a week otherwise light on economic reports, there was some bad news for the U.S. housing market early today as the Mortgage Bankers Association (MBA) reported another weekly decline in mortgage applications. Applications have declined in 12 of the last 15 weeks and are about third of what they were at their peak in February 2021.

The Eurozone had a couple of positive economic reports including a surprise beat on gross domestic product (GDP) and a higher-than-expected increase in employment. However, European markets were still down, causing the Stoxx 600 to fall 0.86%. Stocks likely fell because the positive announcements give the European Central Bank (ECB) more confidence keep raising rates to fight rising inflation.  

Back in the United States, Roku ROKU was up 7.58% in premarket trading. According to Business Insider, there is talk that Netflix NFLX may acquire Roku. In a sign some investors see as confirmation of the deal, Roku has limited its employees’ ability to buy shares through the company.  

In earnings announcements this morning, Campbell Soup CPB beat on top- and bottom-line numbers prompting the stock to rally more than 3% in premarket trading. Additionally, CPB raised their full-year sales guidance.

Thor Industries THO also beat on top- and bottom-line numbers which pushed the stock 3.63% higher before the opening bell. Yesterday, Thor’s competitor Rev Group REVG reported an earnings miss. However, both companies are still reporting strong RV and camper sales despite rising gas prices.

After Tuesday’s close, Casey’s CASY reported a beat on earnings and revenue estimates and raised its dividend. However, the stock fell 1.58% in premarket action. 

Crude oil futures were trading 1.22% higher this morning with the WTI crude just shy of $120 per barrel. If oil continues to rise, it’s likely that the energy sector will continue to outperform other sectors. 

Reviewing the Market Minutes

Stocks began the session lower on Tuesday on revised earnings guidance from Target (TGT) that was even weaker than previous guidance it offered less than a month before. Union Pacific UNP joined in on the negative revisions game too. However, markets turned around with the S&P 500 (SPX) closing 0.82% higher on the day. The Nasdaq Composite ($COMP) and the Dow Jones Industrial Average ($DJI) had similar performances, rising 0.94% and 0.80% respectively.

And in what looked like very real surge of investor confidence, the Cboe Market Volatility Index (VIX) closed 4.19% lower at 24.

Investors also shrugged off news that World Bank had cut its global growth forecast from 5.7% to 2.9% for 2022, even with the ominous warning that the global economy could slip into 1970s-style stagflation because of the ongoing war in Ukraine, lockdowns in China, and supply-chain disruptions.

Investors passing up two negative reports like these and the day’s VIX drop could be good news for stocks. On Tuesday, investors appeared to be in “risk on” mode as the Russell 2000 (RUT) outpaced the major indexes, increasing 1.57% by yesterday’s close.

As stocks bounced back, so did energy prices. WTI crude oil futures rose 1.2% after a choppy day of trading. Rising oil prices lifted the energy sector to the top performer on the day. However, all sectors except consumer discretionary closed in the green. The consumer discretionary sector was weighed down by Tuesday’s retail stock performance reflected by the Dow Jones U.S. Retail Index, which closed 0.68% lower. 

CHART OF THE DAY: UPS AND DOWNS. The Russell 2000 Index (RUT—candlesticks) bounced off its 2018-2020 highs (white box) and rallied back to its Q1 2022 lows (yellow line). If the RUT can break higher, it could also lead the market higher. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

Three Things to Watch

Forward March? The Russell 2000 (RUT) led stocks lower last year, breaking down towards the end of 2021 and falling nearly 30% from its November high to its May low. Many investors have compared the small companies that make up the Russell 2000 to soldiers and the companies in the S&P 500 (SPX) as the generals. The soldiers retreated first, but they may be the first to start marching to higher ground. However, the RUT still needs to break above its own Q1 2022 lows, which it couldn’t do the end of April or the beginning of May.

Low Clearance: Interest in small-cap stocks is one sign that investors are willing to take on more risk.  Interest in growth stocks would be another. On Tuesday, the S&P 500 Pure Growth Index rose 1.2% by the close, ahead of the S&P 500 Pure Value Index’s gain of 0.93%. Of course, one day does not make a trend. The growth index is up 13.8% from its May low while the value index has risen 8.25% from its May low. So, at least in the past few weeks, growth has made better gains.

However, the growth index is right at its Q1 2022 lows as well. So, growth stocks and small-caps are sharing similar technical resistance issues for now.

Sector Strength: Like small-cap and growth stocks, the financial and technology sectors also tend to lead out during market bottoms. But the Financials Select Sector Index and the Technology Select Sector Index are both fighting the same resistance issues as they’re still trading Q1 lows.

What this means is that the bulls need a surge for these groups to break higher. It’s difficult to say where this surge could come from as Treasury yields are much more competitive and tend to be safer.

While these market sectors tend to perform better at market bottoms, there’s no law written in stone that market recoveries have to be built by small-caps, growth, tech, or financial stocks. It’s hard to imagine when reviewing the performance of stocks from 2005 forward, but historically, value stocks have outperformed growth stocks and coming out of the 1982 and 2000 bear markets, value outperformed growth. And in the early 80s, energy stocks like Exxon XOM and Chevron CVX as well as consumer staples stocks like Coca Cola KO and Procter & Gamble PG were among those that helped to spark a 20-year bull run.

Notable Calendar Items

June 10: May Consumer Price Index (CPI) and preliminary University of Michigan Consumer Sentiment Index Results

June 14: Producer Price Index (PPI)

June 15: Retail sales, FOMC Interest Rate Decision

June 16: Building permits, Housing starts, Philadelphia Fed Manufacturing Index and earnings from Adobe ADBE

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

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.