YOUR WEEKLY ROADMAP

This week will be full of potential market moving headlines.

Between a meeting of world leaders, the U.S. debt ceiling drama, a potential credit rating downgrade by Moody’s and a slew of big retail earnings, traders will be actively monitoring the tape and remain on their toes scouring the news wires.

Before we dig into those stories let’s look at the big move the S&P 500 made following the previous week’s huge rally to end October.

We are going to keep this very simple. After spending six days under the 200-day moving average (ironically the same duration we saw in March), the snap-back rally was fast and furious. Going into this week a pause seemed natural, but Friday’s rally took us above some key technical levels and set things up for a nice year-end rally.

Something has changed in price action and sentiment. Maybe it's the November/December seasonal pattern in full effect or something else. The index not only broke its near-term downtrend going back to the July highs, it broke above resistance in its October highs.

Regardless, a Friday rally into the weekend shows how sentiment has changed. Shorts rushed to cover and longs didn’t mind being “risk on” into a weekend. Watch the 50-day moving average to act as support on a pullback to the downside. To the upside resistance levels around 4540 and yearly highs of 4607 are in the crosshairs.

Asia-Pacific Cooperation summit. Chinese President Xi will travel to San Francisco to meet with President Biden this week in San Francisco. Expectations for any market moving comprises are limited.

However, given recent deteriorating communication between the two superpowers, there may only be upside risk to the market. The main topic is that of military communication cooperation, not specific trade negotiation. If anything, this sign of diplomacy could be a step in the right direction.

Credit Downgrade? On Friday afternoon, Moody’s cut the US outlook to negative from stable citing higher interest rates and deficits. They did affirm our AAA rating - the only agency to still hold that rating.

Senior Moody’s official, William Foster, told Bloomberg that higher rates remain a concern. “Our expectation is that these higher rates and deficits around 6% of GDP for the next several years, and possibly higher, means that the debt affordability will continue to pressure the US.”

They also cited political polarization exacerbating fiscal risks. Absent political actions, fiscal strength will decline. Clearly this is a shot at the debt ceiling debate ongoing in Washington. It was this debate earlier in the year that led Fitch to downgrade their rating.

Economic Data.

Consumer Price Index (CPI). The economic data point that has moved markets more than any other over the past year is clearly the CPI. The consumer price index continues to slow and has taken the market higher after most downside surprises.

Economists anticipate headline CPI - which includes food and energy - to drop from 3.7% to 3.3%, year-over-year (chart below). Meanwhile the core number which excludes those items is expected to remain steady at 4.1%. The failure to decrease core inflation will likely be overshadowed by the headline number this quarter.

Any reading in line with expectations then the “data dependent” Federal Reserve should remain on track to avoid a rate hike at their December meeting. However, an upside surprise could frighten the market as the odds of another rate hike would rise. Regardless, the Fed still has a lot of work to do to get to that desired 2% Core CPI inflation goal.

Also during the week we get the Producer Price Index (PPI) and Retail Sales numbers. The retail sales number will be overshadowed by earnings in three retail giants - Walmart, Target and Home Depot. We highlight them below in stocks in focus.

Debt Ceiling Woes and Government Shutdown? The odds of this happening by the November 17th deadline seem to grow stronger each day. Many key figures in the shutdown negotiations went home for the weekend as talks stalled. Can newly elected Speaker of the House Mike Johnson craft a proposal that will be accepted by the needed majority? He sure has his work cut out for him.

More importantly, what could this mean to the markets? Based on historic precedence, we could see a sell-off later this week into the shutdown and then a slight bounce if it happens. Thanks to my friend Sam Stovall for providing the following data.

Since 1976 there have been 20 government shutdowns. The week before the shutdown the S&P 500 has declined an average of -0.4%. On the first day of trading during a shutdown it averaged a gain off 0.1%. To paraphrase Sam, the tourists may be more affected by the government closing than the traders.

Earnings. We are about to put a wrap on earnings season as 91% of the S&P 500 are officially in the books. The last big sector to report is retail with a few big tech names bringing up the rear in PaloAlto (PANW) and Cisco (CSCO).

Stocks in Focus…

The big three in retail report this week and it's been a very mixed story among these heavyweights. The champ has clearly been Walmart (WMT) as it sits at all-time highs and on gains of 17.2% year-to-date. Home Depot (HD) has been an under performer but appears to be getting off the mat. It is lower by -7.6% for 2023 with a few weeks to go in the fight. Lastly there is Target (TGT). The stock has been mired in a controversial boycott, seen sales slump and affected by a record shrink (theft) number. Shares are down -27.3% on the year.

Walmart (WMT) let’s look at this over a 5-year weekly period to show the significance of the recent move ahead of earnings.

The stock broke out above $155 in early summer. It closed (closing prices matter) above $155 and has been able to stay above this old resistance point. What usually happens when a stock breaks above a major resistance level? It becomes support - in simple terms, the old price ceiling becomes the floor.

The longer term trend remains up and as long as the stock remains above $155 the uptrend remains intact. The big news was price action this week ahead of its Thursday earnings release. The stock broke out and closed at all-time weekly highs. The stock is primed to take another leg higher and if it falters there are clear levels of support to enter the trade and mitigate risk.

Home Depot (HD) continues to struggle and is sending many mixed signals when looking at it technically. Yet the longer term risk/reward set-up is starting to favor the bulls.

The bull case based on this daily one-year chart shows a clear level of support around the $275 level that has held several times. We also have a bullish RSI divergence as shown in the blue lines. Simply put, when the stock made a new low at the end of October, the RSI did not confirm this with a new low of its own. This is a positive development that momentum has changed.

The bear case is that the stock still trades below its 200-day moving average. It just created a “death-cross” as the 50-day moving average went below the 200-day moving average. This tends to a negative omen over the long term, but it also tends to be a lagging indicator.

Price action as a result of earnings on Tuesday should help paint a clearer picture. A positive reaction should see the stock climb to that 200-day moving average at a minimum with a lot of room to run. A miss and watch those yearly lows around $275. Given the recent bull run in this market a bullish bias may be in order.

Target (TGT) has been beaten down for the better part of the last two years. The stock is currently trading near multi-year lows and has yet to show any signs of life.

I kept this chart very simple. The 50-day moving average (blue-line) continues to be its line of demarcation. It has failed to close above the average for two consecutive days since April. For any sign of life in the stock it needs to break and close above that mark around $113. The good news is that it has a lot to reverse to revert to the mean and make a run back to the 200-day moving average.

The stock has traded higher by a paltry average of 2% over the last three earnings cycles. It will need a little more juice than that for the turn around to get legs, maybe this will be the start when they report on Wednesday.

Economic Calendar

Tuesday - Consumer Price Index 8:30

Wednesday - Producer Price Index, Retail Sales 8:30

Thursday - Jobless Claims 8:30

Friday - Housing Starts 8:30

THE WEEK THAT WAS

Despite ending an 8 day winning streak on Thursday, stocks extended their November rally thanks to a late afternoon surge on Friday afternoon. All major indexes, excluding the Russell 2000, managed to add onto their big gains from last week.

The S&P 500 rallied again, closing at its highest level in seven weeks and is poised to make a run at 52-week highs as we close out the last several weeks of 2023. News throughout the week focused on a few things - Fed Speak, continued upside momentum and earnings.

Fed Speak. While multiple Fed Presidents made the speaking rounds last week, there was only one man the market cared to hear from, Jerome Powell.

Powell made comments on Thursday that were almost verbatim to the words he spoke after the last FOMC meeting. Yet his tone sounded slightly more hawkish then the week prior. He stressed, again, that interest rates may have to climb further as the Fed was monitoring inflation one data point at a time.

His comments didn’t really cause the market to drop significantly, but were enough to put a wet blanket on the eight-day winning streak. The target rate for the December 13th Fed meeting is at a 90.9% probability that things will remain unchanged again. That is down from a 95.2% chance of no hike just the week before. Not a big move, but worth watching after this week’s upcoming economic data.

Microsoft continues to lead this market higher. The megacap is now up 54% year-to-date and trading at all-time highs. The stock is the second biggest component of the S&P 500 and it alone accounts for 20.35% of the index's gain this year.

Disney reported better than expected earnings this quarter helping shares jump 6.9% on the news. CEO Bob Iger announced that their cost cutting measures remained on track and even increased those projections.

They also received positive news as the actors union reached a labor deal with studios ending their multi-week strike.

I discussed both MSFT and DIS in more detail on CNBC earlier this week. The focus was the importance of recent price swings over the longer term plus key technical developments. You can watch it here.

New Highs. This is a trend we like to see. The new 52-week high list is starting to expand again. This is generally a very bullish development. The list is also expanding to key names across multiple sectors.

Joining Microsoft (MSFT) on the list this week was Walmart (WMT), Cardinal Health (CAH), Eli Lilly (LLY), CBOE, and Hilton (HLT). There are several other high profile names within 5% of new highs as we head into the heart of November. The big one to watch is Nvidia (NVDA). The megacap has rebounded over $70 and reports in a week’s time.

Heat Map. It was a story of the megacaps once again doing the heavy lifting and leading the overall market higher. Six of the “Magnificent 7” stocks with the exception of Tesla (TSLA) finished higher.

They all had gains over 2.8%, with Nvidia (NVDA) and Apple (APPL) jumping over 5%. As a result it was technology and semiconductors lighting the board up the brightest.

MARKET STATS

The party continued in Times Square last week as the Nasdaq 100 (NDX) added to its 6.5% gain last week with another climb of 2.9%. It is now up 42% for the year and shows little sign of slowing down. The SPX and INDU also added to gains as a strong Friday rally capped off another successful week.

It was the Russell 2000 (RTY) that gave back a portion of its prior week's gains. After a remarkable 7.6% rally the prior week, the index failed to maintain that momentum and dropped -3.2%. The small caps remain under pressure and are still lower in 2023.

Fun Fact - This week’s fun fact comes from Bespoke via Twitter. Everyone knows that Apple and Microsoft are the biggest stocks in the world, but did you realize how big they were? I didn’t until I saw the following chart.

Each stock now has a market cap bigger than the entire Russell 2000 combined. 🤯

SECTOR WATCH

It was a mixed bag across all sectors. The winners of 2023 led while the laggards did what they did best - lagged. Technology (XLK) led by new highs in Microsoft (MSFT), along with rallies in Apple (AAPL) and Nvidia (NVDA). The ETF jumped an impressive 4.5% closing just under 52-week highs.

Energy (XLE) was hit again as oil closed at its lowest weekly price since June. The sector is now lower for the year by 2%.

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