- As for the S&P 500, the index faced a key pivot point last week and kept climbing as it broke above its 50-day moving average. The index now sits roughly 1% away from its all-time highs and has potential catalysts to push it higher this week.
- Consumer Price Index is expected to drop moderately from 3.5% year-over-year to 3.4%. This is the first major inflationary number the market will digest since the last FOMC meeting and should have a significant market impact if it misses the mark.
This week things could get interesting.
We get key economic data points in the CPI, PPI and retail sales. On top of those inflation centric numbers key, retailers in Walmart (WMT) and Home Depot (HD) report quarterly results. All of this comes one week ahead of the most anticipated earnings report of the season - Nvidia (NVDA), which reports May 22nd.
As for the S&P 500, the index faced a key pivot point last week and kept climbing as it broke above its 50-day moving average. The index now sits roughly 1% away from its all-time highs and has potential catalysts to push it higher this week.
The index has a clear path to retest the highs at 5264. It is not in overbought territory based on its RSI reading, so it could have momentum its side. Will this week’s inflationary data give us the positive momentum to break higher or will we form a near term double top and pullback yet again?
As one who has believed that the market will chop around for a few more weeks, this level could prove us wrong and catapult us into an early summer rally. Let’s see how the week ends before jumping to a conclusion that the bull is about to roll on.
Consumer Price Index is expected to drop moderately from 3.5% year-over-year to 3.4%. This is the first major inflationary number the market will digest since the last FOMC meeting and should have a significant market impact if it misses the mark.
The Fed will have this reading as well as the May CPI reading to digest ahead of their June meeting. For the rate cut narrative to gain momentum the street will want to see this number resume its downward trend towards 3%.
A moderation of this number despite a resilient labor market will likely take precedent when rate cuts are discussed. However, a weakening labor market as we saw a slight sign of a week ago, combined with a cooler CPI could be that catalyst to take this market to new highs.
Retail Sales numbers are expected to decrease thanks to a drop in average income growth. We are starting to see a more cautious consumer in certain discretionary stocks. However, this is not a consistent pattern across the board.
There is a clear bifurcation among the various restaurant chains. The low end consumer seems to be adjusting their spending more than the high end. For every disappointment there has also been a benefactor. Starbucks falls, but Dutch Bros sees growth. Yum Brands and McDonald’s experience slower sales but Shake Shack, Chipotle and Sweetgreens continue to top their forecasts.
This week we should see a clearer picture of how the consumer is modifying their spending habits due to inflation pressures. We will get retail sales numbers on Wednesday and earnings from the biggest discount retailer in Walmart on Thursday. Is some of the recent weakness a new overall trend or just specific to certain brands?
Sector to Watch - Utilities (XLU)
How many people would guess that the leading sector for 2024 is Utilities?
Be honest… really? You knew that? Well kudos to you, because most people are surprised to hear that fun fact.
Yes, the Utility sector (XLU) is the leading sector of the 11 primary ETF select sectors. It is up 13.5% year-to-date just ahead of Communications and Energy.
This is not exactly the leadership one expects in a bull market as it is defensive in nature, known for its safe dividend plays and slow growth. It is up 30% from its October 2023 low and 20% from its recent February lows.
What’s changed?
First off, earnings growth has increased 30% year-over-year. Secondly, demand continues to grow and prices have risen steadily every year. Lastly, there is an AI play involved. The demand spike due to energy intensive AI is just beginning to surge.
According to Generac CEO, Aaron Jagfiled, in an interview with CNBC’s Jim Cramer, the demand on the grid due to data centers over the next 5 years “is the equivalent of adding 40 million households to the U.S. grid”.
Earnings. Only 8% of the S&P 500 has yet to report as we wind down earnings season. This week highlights include Home Depot, Cisco, John Deere and Walmart.
Stocks in Focus…
Home Depot (HD) shares rallied 15% to start the year, but now have given most of those gains back as it heads into Tuesday afternoon’s results. They have consistently beaten their EPS expectations and shares have rallied after 6 of the last 8 reports.
Investors are closely watching the guidance as consumer spending habits continue to be front and center. While we have seen shifts in some discretionary stocks, will we see it when it comes to the home improvement sector? HD is the third largest component of the Consumer Discretionary ETF (XLF) and its guidance could have ripple effects among the sector.
Technically, we kept this really simple. The stock broke out in December after struggling to get above the $325/$330 level. It went on a nice run to $396 and now has given it all back.
Where did it pause?
Old resistance became support as it held that level as well as its 200-day moving average. This is the line in the sand for HD. It currently trades in the middle of a range between moving averages and the risk/reward set-up isn’t ideal. Support rests around the 200-day while resistance is at the 50-day. Let’s see if the results can break the stock above or below these levels before jumping in.
Alibaba (BABA), the Chinese e-commerce giant, reports quarterly earnings Tuesday morning. Shares are relatively flat for the year and well off its 2023 highs of $119.69.
Reactions to earnings have been dismal at best over the last several years as shares have fallen after 14 out of the last 18 reports.
Technically, there are some silver linings to focus on and the risk/reward set-up is very favorable to the bulls.
The stock appears to have put in a low over the first half of this year and has just broken a 16-month downtrend. We saw a failed breakdown and reversal (circled) back in January. That move got the stock back into a trading range. From there we made a higher low on the next leg down - this is also a positive development.
Lastly, the stock gapped higher above its 50 and 200-day moving averages breaking the longer term downtrend. Traders can watch the gap as a level of support if tested again and set stops accordingly. To the upside, we can see a reversal of the trend continue and a new uptrend begin on positive news.
Walmart (WMT) will be in focus as investors are eager to see if the recent consumer shift in spending had any impact on quarterly results. They consistently beat EPS numbers, but what will they say about their consumers' habits?
They are the bellwether when it comes to discount retail and any shift from them could speak volumes to the impact of inflation.
Technically, the stock has been consolidating since their last report. The stock continues to trade near all-time highs. We are seeing a bullish flagging pattern that is poised to resume upward on a break above $61.50. Will this week’s earnings be the catalyst to do it?
Economic Calendar
Tuesday - Producer Price Index 8:30
Wednesday - Consumer Price Index, Retail Sales 8:30
Thursday - Jobless Claims 8:30
Friday - Consumer Sentiment 10:00
THE WEEK THAT WAS
Overall it was a relatively quiet week in the markets. Volume was lighter than average and the news was relatively dull as we prepare for some bigger events this week,
The Dow is currently riding its longest winning streak of 2024. It rallied every day last week and is now up for eight consecutive days. The index, as seen below, has gained over 1750 points during that stretch and is on the doorstep of 40,000.
The S&P 500 is on a three week winning streak after suffering a 5% correction during a three week losing streak.
The rally has been led by some of the more unusual suspects as defensive sectors in Staples and Utilities have been leaders on this recent run.
Consumer Sentiment numbers came in much lighter than expectations as consumers surveyed expressed concerns over rising inflation, unemployment and interest rates moving in the wrong direction.
The University of Michigan Survey was expecting a reading of 76 for May, but posted a reading of 67.4. This big miss represented a decline of 12.7% and saw it hit its lowest level since November 2023.
While surveys aren’t the most reliable indicator and tend to lag, this statistical measure gauges the perceived health of the economy over the near-term as well as prospects for long-term growth. After a market sell-off in April and continued pricing pressures, the consumer's outlook on inflation is far less optimistic than expectations.
Arm Holdings (ARM) was a stock we were watching closely. Not only because it was the biggest IPO of 2023, but it also exploded higher by 100% within three days of its last earnings report. What would it do for an encore?
The semiconductor company did beat expectations on both the top and bottom line, but guidance was only in-line with expectations. As a result shares initially dropped by as much as -8% after results but snapped back quickly to recapture those losses and finish the week with a 5% gain.
STOCKS IN THE NEWS
Sweetgreen (SG) shares jumped over 30% after reporting earnings that were better than analyst expectations and raised their full-year forecast. The healthy salad chain continues to methodically expand and has yet to see a consumer slowdown. Shares finished the week up 43% and are now up an amazing 179% year-to-date.
Reddit (RDDT) issued its first earnings report as a publicly traded company and didn't disappoint. Shares rallied 14.8% on the week after seeing stronger revenue growth and an increase of daily active users on their platform. Shares closed at $53.53 which is well above its $34 IPO pricing back in March.
Uber Technologies (UBER). The ride-hailing giant fell more than 8% after posting mixed first-quarter results. The company’s overall revenue exceeded expectations but posted a loss of 32 cents per share compared to an expected loss of 23 cents per share. On a positive note, their monthly active consumers rose 15% to 149 million in the first quarter. The number of trips rose by 21% year-over-year to 2.6 billion.
The stock managed to make back some of those initial losses by the end of the week. Shares of UBER closed at $66.99, down -3.2%
Shopify (SHOP) plummeted 19% as the company’s disappointing revenue and profit guidance for the current quarter overshadowed better-than-expected results for the latest reporting period. SHOP forecast revenue growth that was at a slower rate than previous quarters. For the week shares fell by -20.8% to close $58.94.
Heat Map. The bulls were back in force as green dominated the heat map across all sectors. All 11 sectors finished higher with Utilities sparking much of the rally.
The financials also continue to move higher led by credit services and banks. The two most notable losers were Disney and Tesla.
IPO NEWS
On Friday the largest Chinese company since DiDi Global’s debut in 2021 hit the public markets when Chinese EV maker Zeekr (ZK) began trading at the NYSE. Shares were priced at $21, opened at $26, traded as high as $29.36 before ending its first day at $28.26. That was good enough for a 34.6% gain.
The IPO market remains active and those coming to market have been rewarded with strong valuations and respectable performances out of the gates. So far 2024 has eclipsed both 2022 and 2023 in total proceeds raised.
MARKET STATS
All major indexes gained over 1% on the week with the Dow Jones leading the way. The blue chip index was up every day last week and now stands within 1% of a new all-time high.
The Russell 2000 continues to climb back after a rough April as the yield sensitive index rallied as rates eased back to just under 4.5% on hopes that a rate cut may still be on the table.
SECTOR WATCH
All 11 sectors managed to finish the week higher despite a lack of any significant economic data or strong volume. The leader with a gain of 4.2% was Utilities (XLU). The higher-for-longer rate narrative that tends to hinder defensive plays like utilities was ignored as a second consecutive weekly drop in rates help bolster the sector.
The lagging sector was Consumer Discretionary (XLY) as it continues to see certain members of the index struggle during earnings as consumer spending habits are starting to shift more cautiously.
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