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Stock Market Update

The cost of capital is in the crosshairs as the Federal Reserve meets this week and investors question the payoff of AI infrastructure spending in a high interest rate environment. While the Fed is widely anticipated to hold rates steady this week ahead of midterm elections, the most recent consumer and producer inflation reports will keep pressure on tighter policy in the months ahead. At the same time, jumping longer-dated yields are increasing the cost of capital for AI spending that’s being increasingly funded with debt. Credit spreads on more indebted AI-related borrowers are adding to the cost of financing, with some companies like CoreWeave seeing bond yields hit distressed territory. The chart below shows CDS spreads for various AI ecosystem stocks, which represents the cost to buy insurance against issuer default.

While stocks linked to the AI trade are pulling back since the start of October, there’s been a turn in market breadth. Given the weight of AI-linked stocks on the major indexes, weakness in the S&P 500 and Nasdaq are masking strength in other sectors. In fact, an ETF tracking large-cap value stocks is hovering right at record highs while large-cap growth has pulled back nearly 7% in the past three weeks. Along with the improvement in breadth, we should watch for signs that the AI trade could find a bottom soon. Semiconductor stocks are heavily exposed to AI infrastructure spending and reflect investor sentiment around the sector. The Roundhill Memory ETF (DRAM) tracks memory stocks like Micron Technology and SK Hynix, and is testing the lows from the selloff into July. Many stocks across the space are also in the process of testing the summer lows, which could spark a rally from price support.

While there’s been plenty of concern swirling around the AI trade and threat to the economy from a deceleration in related infrastructure spending, I believe recession fears would be reflected by a broader pullback in equities instead of the rotation into the average stock that’s actually taking place.

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Stock Market Update

While investors expect the Federal Reserve to hold rates steady at its next meeting later this month, a growing inflation problem will keep favoring tighter monetary policy. The Consumer Price Index (CPI) for the month of September was reported at 3.7% year-over-year versus expectations for an increase of 3.6%. The Producer Price Index (PPI) was especially worrisome, with a headline increase of 6.3% compared to estimates for 5.3%. The core PPI that strips out food and energy prices jumped by 5.0% compared to last year. The chart below overlays headline CPI and PPI, where you can see that PPI has accelerated to the highest level since 2022 (blue line) and keeps the acceleration in producer inflation intact. You can also see that the PPI tends to lead CPI historically.

The reaction from the bond market was unexpected. A recent reversal lower in longer-term interest rates continued pulling back despite worse than expected inflation. The 10-year Treasury yield sits at 5.09% compared to 5.31% at the start of October (chart below). At the same time, the AI trade remains under pressure ever since OpenAI announced lower than expected annualized revenue at $50 billion. While the miss is being blamed on an accounting discrepancy, investors are second guessing the potential return on trillions being plowed into AI infrastructure spending. Chip stocks have been a huge beneficiary of AI spending, and are collectively pulling back toward the summer lows as evidenced by the VanEck Semiconductor ETF (SMH).

The AI trade is being pressured by the outlook for returns on investment along with rising rates and accelerating inflation that also threatens the cost of capital. Given the role of AI capex spending in contributing to economic growth, any deterioration in the outlook could be a factor in driving the recent decline in bond yields. But if recession fears were on the rise, then I would anticipate a broader pullback in equities. Instead, the recent price action has been a rotation out of AI and related growth stocks and back into value. Since October 6, large-cap growth stocks are down 6% while large-cap value is up nearly 2%.

The price action remains volatile with quick rotations over the past several months now. That makes breakouts hard to come by, but tracking relative strength across stocks and sectors remains key to finding the next round of position trading opportunities. Keep reading to see:

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Stock Market Update

A pair of reports covering the Federal Reserve’s dual mandate hit the “Goldilocks” zone for investors. First up was the Personal Consumption Expenditures (PCE) price index for the month of August. Headline PCE inflation was reported at 3.4% while the core measure that excludes food and energy prices rose by 3.0%. Both increases were less than expected and moderated from the pace seen in July. Next came the nonfarm payrolls report for September, which showed 29,000 jobs added during the month. The figure fell well short of estimates for 84,000 while the prior two months were revised lower by 60,000 total jobs. The chart below shows the three- and six-month average of payroll growth to smooth out monthly fluctuations.

While the jobs report missed expectations, the result wasn’t bad enough to spark fears of a more significant slowdown in the economy. But along with the cooler than expected PCE report, the outlook for the Fed’s next move took a dovish turn. Market-implied odds now favor the Fed holding rates steady when it meets later this month compared to a 70% chance for another rate hike before last week’s reports. Fears around the Fed are easing at a time when market breadth over longer-term measures are hitting extremely oversold levels. At one point last week, the percent of stocks across major exchanges trading above their 50-day moving average (MA) stood at just 25% in the chart below.

Breadth has been this oversold just one other time this year, which was back in late March as the S&P 500 fell near correction territory. Oversold conditions helped spark a reversal back then, and could do so again. That’s especially the case with various measures of investor sentiment showing heightened levels of fear in the market. Shifting views around the Fed and a slower pace of rate hikes could become the catalyst for a durable rally.

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Stock Market Update

Bond market volatility is pressuring the stock market, except for the biggest stocks. An ETF tracking the “Magnificent 7” broke out to new records highs last week driven by a surge in Meta Platforms following their new AI agent. That’s helping prop up the S&P 500 and Nasdaq which are both trading just below their respective record highs. But it’s a much different story under the hood, where the average stock is pulling back. The percent of stocks across the market trading above their 20-day moving average (MA) stands at just 29%. There have also been more stocks making new 52-week lows than new highs across major exchanges since the end of August that you can see in the chart below tracking net new highs.

While market breadth is deteriorating sharply since mid-August, an extremely oversold breadth condition is forming. On a year-to-date basis, the percent of stocks trading in short-term uptrends has only been this low back in late March when the S&P fell near correction territory. Many other measures of breadth show the presence of an oversold condition while investor sentiment has seen a large jump in bearish views over the past two weeks. The AAII sentiment survey of retail investors showed bearish views at 53.3% last week and 48.1% this week, which is well above the historical average of 31.5% and outnumbers bullish views (chart below). CNN’s Fear & Greed Index also remains firmly in “fear” territory.

While interest rate volatility and hawkish shift at the Federal Reserve is playing a role in pressuring the average stock, evidence doesn’t yet point to a deteriorating economy. That supports the corporate earnings outlook, which means the combination of oversold breadth and negative investor sentiment could help spark a rally.

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Stock Market Update

For the first time in over three years, the Federal Reserve hiked interest rates by a quarter point to a range of 3.75% to 4.0% and signaled there could be additional increases ahead. Fed Chair Kevin Warsh acknowledged that economic and labor market activity aren’t cause for concern while the meeting statement reiterated that the Fed will “deliver price stability”. Warsh also described the action as removing “a dose of accommodation”, which implies that the central bank still sees the current stance of monetary policy as being stimulative to the economy rather than being restrictive. Following the meeting, market-implied odds now favor three additional rate hikes into mid-2027 (table below).

The 2-year Treasury yield, which warned of tighter monetary policy, still sits at 4.67% or 67 basis points above the upper end of the Fed’s new target. The bond market also favors more rate hikes ahead, and signs of an economy expanding at a solid pace could place additional pressure on the Fed to act. A report on retail sales showed a 1.2% monthly gain in August which was the strongest increase in five months. Strong consumer spending is helping boost GDP estimates, with the Atlanta Fed’s GDPNow estimate running at 5.1% annualized for the third quarter (chart below). The estimate is also receiving a boost from inventory restocking which bodes well for future economic activity.

While investors are wondering what the Fed’s rate hiking cycle means for the S&P 500, evidence of strong economic growth should help keep the earnings outlook in tact. As long as the Fed is hiking at a measured pace that doesn’t call into question the growth outlook, the rally in equities can persist.

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Stock Market Update

Following the latest reports on consumer and producer inflation, expectations are now running high that the fed will hike rates at their meeting this week. The Producer Price Index (PPI) jumped 5.4% in August while the core measure that excludes food and energy prices gained by 4.6%. The Consumer Price Index (CPI) came in at 3.4% year-over-year while the core measure increased by 2.4%. While consumer inflation isn’t showing signs of renewed acceleration, Fed officials are growing impatient with inflation running above the 2% target (chart below). That comes on the heels of the August payrolls report that showed 162,000 jobs created during the month. As a result, market implied odds now show an 86% chance of a Fed rate hike this week.

Despite the latest market odds pivoting to anticipate tighter monetary policy, stocks finished the week with strong gains. That followed the development of an oversold breath condition, which you can see with the percentage of stocks trading above their 20-day moving average in the chart below. The breadth metric dropped below 30%, which has coincided with bottoms around prior selloffs over the past year. Despite the recent rebound, I would continue being mindful of difficult calendar seasonality especially during the lats two weeks of September that are historically one of the worst two-week stretches of the year.

I would prefer to see one more push lower in breadth metrics to reach into deeply oversold territory. Then if stocks do start to rally from an oversold breath condition, focus on sectors showing the best relative strength. Stock in copper miners, select semiconductors, and gold mining stocks are worth following closely for new breakouts. Keep reading to see:

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Stock Market Update

An August payrolls report that smashed expectations is adding additional uncertainty over the Federal Reserve’s next move on interest rates. Nonfarm payrolls added 162,000 jobs last month which was triple the 53,000 expected. The prior two months were also revised higher by a combined 55,000. The report came a day after influential Fed Governor Christopher Waller favored keeping rates steady in September assuming no big surprises in next week’s inflation reports. But evidence of a strong job market coupled with inflation that’s ran above the Fed’s 2% target for over five years will put pressure on the Fed to act. The 2-year Treasury yield that tends to lead changes in the fed funds rate now sits 62 basis points above the current upper fed funds target, implying the bond market expects at least two rate hikes ahead (chart below).

Major stock indexes pulled back slightly after the jobs report, with stocks recently rallying on hopes of the Fed holding rates steady versus pulling back when odds for a hike increase. While the knee-jerk reaction is centered around the rate outlook, it’s worth keeping in mind that good news for the economy should be good news for corporate earnings. The jobs report adds to recent data pointing to an economy expanding at solid pace, which should support the bull market looking ahead. Over the near-term, stocks are just starting the worst month of the year for calendar seasonality while volatility should be no surprise heading into midterm elections. It’s worth noting that we’re seeing a deterioration in breadth, with the cumulative NYSE advance/decline line pulling back in the chart below.

While the average stock is pulling back, it’s interesting to note that the market’s biggest stocks including the Mag 7 could be setting up to take the lead again. I’ll have more on that in our chart breakdown for trade ideas below.

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Stock Market Update

Although new Federal Reserve Chair Kevin Warsh promised to change how the Fed communicates with the capital markets, his first keynote speech at the Jackson Hole Symposium contained few surprises. Warsh sounded hawkish in describing inflation as running above target and reiterated the Fed’s need to focus on price stability, but stopped short of hinting at any policy action at the next rate-setting meeting in September. Comments around price stability mostly echoed statements that Warsh has previously made following Fed meetings. While equities didn’t see much intraday volatility following the address, it’s worth noting that odds for a September rate increase versus holding steady slightly favor a hike compared to odds favoring no change in rates before (chart below).

While declining to provide any sort of forward guidance, Warsh did note that financial conditions could not be described as restrictive. If anything, overall financial conditions are running at extremely loose levels based on a measure released by the Fed’s Chicago district in the chart below where a reading below zero indicates looser than average conditions. Loose conditions point to relatively cheap and plentiful credit, which is associated with positive economic activity and is a tailwind for asset prices. Extremely loose conditions should give the Fed plenty of cover to raise rates at a gradual pace if it chooses to do so. It will be hard to justify keeping rates steady with an economy showing strong activity while the most recent PCE price index came in at 3.7% in July compared to last year. Inflation has remained above the Fed’s 2% target for over five years.

While stocks could be vulnerable to short-term volatility around uncertainty to the rate outlook along with approaching mid-term elections, it’s hard to see a tightening cycle repeating 2022’s pace of rate hikes. Loose financial conditions and evidence of positive economic activity that supports the earnings outlook should keep the bull market moving forward. Keep reading to see:

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Stock Market Update

A report pointing to rising economic activity and easing inflationary pressures coupled with renewed efforts to lower long-term interest rates is boosting sectors sensitive to liquidity. The latest data covering activity in the domestic manufacturing and service sector of the economy show activity expanding at an accelerating pace, with S&P Global’s Flash U.S. PMI coming in at 56.0 compared to 54.5 last month. A reading over 50 indicates expansion, with the monthly gains concentrated in the service sector of the economy. The chart below overlays the U.S. composite PMI with annualized GDP growth, with the PMI hitting the highest level in over four years.

While the PMI report shows output prices remaining above the 50 threshold, recent months have seen a deceleration alongside some moderation in consumer inflation. That hasn’t stopped longer-dated Treasury yields from rising to the highest levels seen in nearly 20 years, so the U.S. Treasury is stepping in to intervene by doubling a buyback program to purchase long-term bonds. While the move is being described as providing liquidity, the real reason is a form of yield curve control where short-term bonds will be issued to fund proceeds for the buyback program. The program size will increase to at least $4 billion, which is a negligible amount relative to the amount of Treasuries outstanding that’s crossing above $40 trillion (chart below). But the intervention shows that officials are watching rates with concern and are willing to take action to stem the rise in yields.

More evidence of a strong economy that supports the earnings outlook and moves to boost liquidity are more tailwinds for the stock market and are delivering a boost to liquidity-sensitive asset classes including gold and Bitcoin. Gold mining stocks are back to showing relative strength, and are setting up new basing patterns.

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Stock Market Update

A pair of reports showing moderating inflation is helping keep the outlook for monetary policy from turning too hawkish. Last week featured the Consumer Price Index (CPI) and Producer Price Index (PPI) for the month of July. The headline CPI figure came in at 3.4% compared to last year while the core figure that excludes food and energy prices increased by 2.5%. The headline PPI jumped 4.7% while the core reading registered 4.2% year-over-year. The readings all around continued moderating from June’s pace but remain well above the Federal Reserve’s stated target of 2% annual inflation. In fact, the core CPI measure hasn’t registered a reading below 2% since early 2021. The chart below shows various core components for the CPI, including the “supercore” made up of core services ex-housing to track labor-intensive industries.

While producer and consumer inflation levels remain above target, the falling rate of change compared to prior months is boosting hopes that interest rate hikes by the Fed will either be delayed or lessen in magnitude. Current market-implied odds favor the Fed holding rates steady at the next meeting in September, followed by one hike before year-end (chart below). Following one quarter point hike, the Fed is projected to hold rates steady through next year. However, it’s worth noting that the current level of the 2-year Treasury yield sits 0.42% higher than the current upper target of the fed funds range, implying a slightly more hawkish take from the bond market.

The current economic and liquidity backdrop should remain supportive for equities. While uncertainty ahead of midterm elections could present volatility, the combination of loose financial conditions (boosted by renewed optimism around the Fed) coupled with rising forward earnings estimates should be bullish tailwinds for stocks. Keep reading to see:

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Stock Market Update

A big miss on nonfarm payrolls is shifting the narrative around the Federal Reserve and outlook for monetary policy. The July jobs report showed that 23,000 jobs were lost during the month (chart below) compared to expectations for a gain of 80,000. At the same time, the prior two months were revised lower 103,000 jobs while the unemployment rate decreased due to a drop in labor force participation. While there could be distortions in the data around seasonal adjustments and impact of World Cup, the poor report is being greeted with enthusiasm by the stock market which is rallying in the immediate aftermath of the data.

That’s because bad news on the economic front is being interpreted as taking the pressure off the Fed to hike interest rates. Market-implied odds now slightly favor the Fed keeping rates steady at the next meeting followed by just one rate hike before holding steady well into next year. One bad jobs report doesn’t mark a trend, but investors need to keep in mind that stock prices follow earnings over the long run. Other data released this week shows both the manufacturing and service sector of the economy holding up just fine, while the leading new orders components remain in expansionary territory. In the ISM’s manufacturing report, the spread between new orders and inventories is widening, which tends to be a good sign for future economic activity (chart below).

The next big catalyst to steer the direction of the Fed will be the CPI inflation report due out next week. The S&P 500 also remains in a volatile stretch of seasonality for the next couple months, with new trade setups continuing to fill out basing patterns. Keep reading to see:

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Stock Market Update

Disagreement and uncertainty over the forward path of monetary policy is rising at the Federal Reserve. While the central bank left policy rates unchanged as widely expected, there were three dissenting votes against the action where officials preferred a rate hike. It was the largest number of dissenting votes early into a new Fed chair’s term since the 1970s and highlights the growing divide within the Fed as consumer inflation pressures mount. Fed Chair Kevin Warsh continued to portray a hawkish view toward inflation, and reaffirmed the Fed’s commitment to a 2% inflation target. Following the meeting, massive moves are underway across key segments of the capital markets. That includes the 30-year bond yield, which is building on another attempt to breakout over the 5% level (chart below).

There’s also an outsized move happening in currency markets. The U.S. Dollar Index is seeing a sharp reversal lower from a double-top pattern after testing resistance near the 102 level in the chart below, and is now losing support at the 50-day moving average (black line). While part of the move is being driven by speculation over intervention by Japanese officials to support the yen, the pullback in the dollar has implications for other market sectors. The broader commodities trade is heating up once again, while developed international equities are nearing a breakout from a multi-month basing pattern (more on that in our trade ideas below).

Other sectors seeing a recent pullback are trying to find traction in the wake of the Fed meeting, including semiconductor stocks. While time will be needed to see new bases evolve with that group, plenty of relative strength is emerging elsewhere. Keep reading to see:

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Stock Market Update

Massive moves are underway across the yield curve despite a weaker than expected consumer inflation report. Last week, the June Consumer Price Index (CPI) showed an increase of 3.5% year-over-year while the monthly change dropped by 0.4%. The annual gain was less than expected while the monthly decline was the largest decrease since April 2020. But as tensions in the Middle East intensify and oil prices rapidly increase, interest rates are jumping across maturities. The 2-year yield that tends to lead fed funds is now at 4.31% and sits well above the Federal Reserve’s target range. Longer-dated yields are rising as well, with the 30-year rate attempting another breakout above the 5% level in the chart below.

That shows the market isn’t buying into a narrative of moderating inflation despite the most recent CPI report, which could pressure equity prices. Stocks are sensitive to rising yields due to the impact on valuations and competition for investor capital. Rising rates on the short-end also points to tightening monetary policy, where market-implied odds are now pricing two rate hikes by year end. That’s placing downward pressure on stock indexes, especially those more exposed to growth like the Nasdaq-100 Index that’s already broken down from a triangle pattern. The S&P 500 is now testing trendline support of its own triangle pattern while also moving below the 50-day moving average in the chart below.

It’s also worth noting that the S&P 500 is now exiting a favorable seasonal period that runs into late July, with history suggesting a volatile period through September. That could especially be the case given midterm elections on the horizon and as uncertainty in the Middle East climbs again. But as I noted in my video update to Hub members, a period of basing action in stocks leveraged to the AI trade (like semiconductors) could setup the next round of breakouts. Keep reading to see:

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***There will be no reports sent over the coming week while on vacation with my family✌️

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Stock Market Update

A tug-of-war is playing out in interest rates as inflation fears jump once again while recent labor market data came in softer than expected. Oil prices are jumping as military strikes between the U.S. and Iran intensify with President Trump declaring the ceasefire is over. Tanker traffic through the Strait of Hormuz was starting to normalize, but could be blocked once again. As we’ve seen since the start of the conflict, escalations and reversals happen often. But the threat of another jump in energy prices is placing upward pressure on long-term interest rates. On the other side, the June payrolls report came in much weaker than expected while prior months were revised lower. A sharp drop in the labor force participation rate was behind a decline in the unemployment rate. While there’s significant noise around rates, I’m keeping a close eye on the 30-year Treasury yield’s ascending triangle pattern below.

A breakout in long-term rates may present obstacles for the rally, but the S&P 500 is nearing completion of a short-term bullish chart pattern. The chart below shows the S&P is starting to breakout from a short-term symmetrical triangle pattern forming since the peak in June. Pullbacks in the pattern have found support at the 50-day moving average (black line), while the MACD is turning higher from a bullish reset at the zero line. The backdrop for a breakout remains bullish. Various measures of investor sentiment point to elevated levels of fear, calendar seasonality is favorable during July, and measures of market breadth are showing that the average stock is leading.

There has been a pullback in leading sectors and industries off the March lows, which could lead to the next round of bullish chart setups. That includes stocks leveraged to the AI infrastructure buildout like semiconductors, where many names are starting new basing patterns. Keep reading to see:

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Stock Market Update

Investors initially cheered a much weaker than expected June payrolls report along with negative revisions to prior months. The economy created just 57,000 jobs during June compared to estimates for 115,000, while May and April’s figures were revised lower by a combined 74,000 jobs. The knee-jerk reaction from investors was to push stock index futures higher, signaling a regime where bad economic news is good for stocks due to the impact on the rate outlook. While odds for a rate hike turned more dovish immediately following the report, eventually the outlook reverted back to a similar scenario before the payrolls report which is an anticipated rate hike at the Fed’s September meeting. Overall, the recent trend in payrolls is inflecting higher based on the three- and six-month moving averages (chart below).

The reality is that the payrolls report reflects a “Goldilocks” figure for the average stock, which isn’t too cold to stoke growth fears and not too hot to pull additional rate hikes forward. While the S&P 500 finished the day flat following the jobs report, there continues to be a massive rotation under the hood. Large-cap value stocks finished the day up 1.20% while large growth was down 1.51%. Excessive momentum in the AI infrastructure trade continues to be unwound while the average stock gets a boost on the broadening economic growth outlook. While the payrolls report is in focus, an updated report on manufacturing activity in June from the ISM survey shows the leading new orders component remaining firmly in expansion territory above the 50 level (chart below).

The key to navigating the rotation is to be proactive taking profits on positions with large gains while seeking out relative strength in new setups. Charts showing sound basing structures in companies with a strong fundamental growth profile remains our primary focus. Keep reading to see:

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Stock Market Update

Investors are contending with an uncertain interest rate outlook following the Federal Reserve’s latest rate-setting meeting. While the meeting carried a hawkish tone over inflation concerns along with a strong economic backdrop, the peace deal between the U.S. and Iran has seen oil prices return to levels before the conflict started. But as a reminder of the recent impact of soaring energy prices, a consumer inflation report jumped to levels not seen in over three years. The PCE price index - the Fed’s preferred inflation gauge - increased by 4.1% in May compared to last year. The core figure that strips out the impact of food and energy prices rose by 3.4% and hasn’t been at the Fed’s 2% inflation target since early 2021 (chart below).

While the inflation picture continues to worsen, the average stock has been gaining ground on the capitalization-weighted indexes recently. That likely reflects evidence of broadening economic activity, which supports the earnings outlook outside of the AI trade. Bullish factors could be lining up to push the rally further into the month ahead. Investor positioning isn’t stretched while various surveys of investor sentiment like the AAII report on retail investors shows bearish views running above the historical average. At the same time, the S&P 500 is about to enter one of the best months of the year for calendar seasonality. While weakness in the back half of June is common, July ranks as the best performing month over the past 20 years (chart below).

Expanding breadth has been a tailwind to trade setups, where we’ve been focusing new exposure to sectors showing relative strength like biotech. Strong earnings from Micron Technology (MU) is helping boost our other tech and AI positions. Keep reading to see:

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Stock Market Update

The first Federal Reserve rate-setting meeting under new chairman Kevin Warsh contained more hawkish surprises than investors expected. Heading into his nomination, Warsh has been under intense pressure from President Trump to lower interest rates. That prospect was always going to be difficult given the Fed sets interest rates by committee, but Warsh came across as being hawkish in his commitment in bringing inflation down to the Fed’s 2% target while removing the easing bias from the Fed’s meeting statement. Across the committee, nine of 18 members providing projections saw at least one rate hike this year which brought forward market-implied probabilities for a rate hike to the September meeting. Following the meeting, the 2-year Treasury yield that tends to lead changes in fed funds jumped to the highest level in over a year and is well above the current fed funds rate (chart below).

While equities initially sold off on the hawkish surprise, major indexes mostly recovered the losses and finished a holiday-shortened week with solid gains on a peace deal between the U.S. and Iran. This time a deal has actual substance with both sides signing an agreement that also reopens the Strait of Hormuz. Stocks are rallying as oil prices pull back, but it’s the recent improvement in breadth that’s most notable. During the rally off the late March lows, participation was narrowly concentrated in tech sector names especially semiconductor stocks. But as recent economic reports point to solid overall activity, the average stock is catching up. You can see that with the cumulative NYSE advance/decline line, which is now breaking out to new record highs following a period of consolidation (chart below).

The broadening rally is starting to drive a new round of breakouts, where we’ve been adding positions to the model portfolio. I’m also monitoring developments and chart action in ETFs covering sectors like biotech and international regions that are setting up constructively. Keep reading to see:

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Stock Market Update

A spike across consumer and producer inflation isn’t offsetting investor hopes for a lasting peace deal out of the Middle East. The Consumer Price Index (CPI) jumped by 4.2% in May compared to last year while the Producer Price Index (PPI) surged higher by 6.5%. Both inflation measures are at the highest level since coming out of the pandemic-driven inflation wave (chart below). While there are hopes that a peace deal (once again) between the U.S. and Iran will help temper the energy-driven rise in inflation, there are signs that price pressures are spreading elsewhere. The supercore measure in the CPI looks at core services excluding shelter, which is a good way to proxy wage-driven inflation from service sectors. It jumped by 3.7% in May and has been inflecting higher in recent months.

While equity markets seemed to shrug off inflation fears and the impact to valuations and monetary policy, better economic data is giving the average stock a reason to rally. While some of the air is being released from the massive rally in AI infrastructure stocks, laggards off the late March lows are turning up recently. You can see that with measures of the average stock. The percent of stocks across the market trading above their 20-day moving average is diverging positively from the S&P 500 in the chart below. The dashed lines show that while the S&P 500 (blue line) is pulling back, the number of stocks in short-term uptrends (black line) is seeing improvement.

Broadening participation likely reflects recent improvement in labor market data and what that means for the earnings picture outside of the AI trade. The market activity and basing reset in many growth stocks could be setting up the next round of major breakouts. Keep reading to see:

• Open ETF positions.

• Open stock positions.

• Chart analysis for new trade ideas.

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These ideas are the end result of my process to identify stocks offering the right combination of growth fundamentals along with a proper chart setup. Live alerts are sent to Traders Hub members only.

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Stock Market Update

A batch of better than expected economic reports is setting up a highly anticipated May payrolls report. Updated surveys on manufacturing and service sector activity from the ISM saw growth accelerate in May compared to April while leading indicators of activity jumped as well. The new orders component of the manufacturing survey was reported at 56.8 while services jumped to 57.3. The surveys are constructed so that a reading above 50 indicates expansion. This week also saw an updated JOLTS report covering the month of April, which showed job openings surging to 7.6 million jobs during the month and is the highest level of openings in nearly two years. The jump in job openings is another confirming indicator on the earnings outlook, where the rate of change closely tracks corporate profits (chart below).

While business surveys and job openings is another tailwind for the earnings outlook, the data is putting more pressure on the Federal Reserve and its policy stance. In the same ISM surveys, measures of prices paid remain near extremely elevated levels which tends to lead inflation. If the payrolls report for the month of May confirms underlying strength in the economy and labor market, the outlook for monetary policy will grow more uncertain given the recent jump in consumer and producer inflation. At the same time, evidence of solid economic activity is helping the average stock catch up to the gains in the S&P 500 and Nasdaq. The chart below plots the NYSE cumulative advance/decline line and is a way to track the average stock. The A/D line has been lagging cap-weighted indexes in breaking out to new highs, but is closing in on new high ground.

More constructive action in the average stock as evidenced by the A/D line is creating more trade setups to add to the watchlist. Current open positions in high growth themes continue to hold above key moving averages, so we’ll keep trailing those holdings. Keep reading to see:

• Open ETF positions.

• Open stock positions.

• Chart analysis for new trade ideas.

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These ideas are the end result of my process to identify stocks offering the right combination of growth fundamentals along with a proper chart setup. Live alerts are sent to Traders Hub members only.

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Stock Market Update

The narrative driving the stock market has hardly changed in recent weeks. Optimism around a potential peace deal between the U.S. and Iran helps to spark a rally in the major indexes. For the most part, there has been very little substance behind the headlines, but that hasn’t stopped the rally in stocks linked to the AI infrastructure buildout. At the same time, challenges to the inflation outlook continue building. The Federal Reserve’s preferred inflation gauge - the Personal Consumption Expenditures (PCE) price index - was released for the month of April. The headline figure jumped by 3.8% compared to last year while the core figure that excludes food and energy prices rose by 3.3%. For investors hoping that the boost in inflation could be temporary from the jump in energy prices, the report contained bad news. The core goods figure that excludes food and energy rose by 2.8% and is one of the biggest increases in decades outside of the pandemic aftermath.

That shows underlying inflation has been a growing issue even before the spike in energy prices, and likely reflects supply chain upheaval from last year’s trade war. The major stock indexes continue grinding higher despite rising inflation and the impact on interest rates across the yield curve and outlook for monetary policy. But market-based inflation expectations are nearing levels that have posed issues for stock prices in the past. The chart below plots the S&P 500 along with the 10-year inflation breakeven rate. A push toward the 2.5% level on inflation breakevens has pressured the S&P 500 over the past few years, and is nearing that level once again.

Since last week, there’s been an improvement in the rally’s participation as short-term breadth turns higher from an oversold level. An increase in bearish investor sentiment has been a tailwind as well. While it’s been difficult finding new setups offering low risk entry points, open positions continue working higher while respecting key moving averages. Keep reading to see:

• Open ETF positions.

• Open stock positions.

• Chart analysis for new trade ideas.

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