Overheated Stocks Finally Cool Off

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Last week’s trading finally brought a pullback in stocks that many had been expecting after the meteoric rise off of the April 7^th lows. Headed into the week, the S&P 500 had risen in 16 of 19 trading sessions, essentially moving straight up parabolically. Of course, as much as we would all like for this pattern to continue, this cannot be sustained forever. Stocks were looking for a reason to sell off and consolidate some of the recent gains and the market found a reason to decline. Early last week, U.S. Treasury yields continued their recent march higher with the 10-year yield breaking out to a new short-term higher high of 4.63%. The catalyst driving this movement last week was largely coming from Congress as the House passed its version of the “Tax-Cut” bill. While no bill is signed into law yet, in the form that was advanced, it does little to immediately address the U.S. fiscal deficit which resulted in the bond market driving Treasury yields higher. Also, to a smaller extent, there was the Moody’s downgrade of the U.S. government’s credit rating, however, this was not a shock to many investors, so at this point it’s effect on yields has been marginal. As equity investors saw this unfolding, of course concerned about rising interest rates and borrowing costs, this served as reason enough for some to sell stocks, taming the furious rally higher that we had recently experienced. After the recent rise, we gained so much ground so quickly it was only reasonable to expect that we would have to give some of that back in order to build a durable trend higher.

After last week’s trading the market technicals are still looking quite favorable. As mentioned last week, it was significant that the S&P 500 broke above its 200-day moving average and even more so because the index followed through and closed above it for 10 consecutive trading sessions. Now, on Friday we finally got the retest of the 200-day moving average that I had been anticipating. While this level had previously served as a level of resistance, now that we have broken through and held above it, this is a key level of support. As of Friday, the retest of this support level was successful as the S&P 500 traded down to this level and rallied higher to close out the day. This will continue to be a key level to watch moving forward. Any further successful retests of this support level are positive for stocks as they will avoid making new short-term lower lows. After the recent rip roaring move higher, breadth indicators also showed strong improvements signaling that this move was powered by a wide basket of stocks and not just a smaller pocket of the market moving the index higher. As of Monday, actually 55% of S&P 500 stocks had recaptured their own 200-Day moving average, a sign that they are in a long-term uptrend. While this percentage slipped a bit to end the week, this was an additional positive sign. Furthermore, the Advance/ Decline line for the S&P 500 index set a new high on Monday before retreating towards the end of the week. As of Friday, this line was still above the recent range it broke out of and staying above this range will be key moving forward. This is another sign of the powerful breadth of the momentum we have seen in stocks over the past few weeks. Now, consulting the technicals, there is still really not much in the way between current levels and the all-time high of 6,147 on the S&P. I expect that once stocks have finished consolidating, we will get some further positive catalysts that will drive markets higher and challenge these all-time highs. In fact, we could get some good news this week that is significant enough to move markets which I will cover next.

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Key Events to Watch For

Trade Policy/ Treasury Yields (10-Year Yield)
April PCE Inflation
Sneaky Earnings Week (NVDA, COST, CRM, DELL)

After last week’s hiccup in trade deal progress, which investors largely looked past, markets will be hoping to see more deals made in the weeks to come as well as see additional progress in arriving to a final agreement with China. Until finalized deals are made with our most significant trading partners, stocks are going to remain captive to trade policy headlines to at least some extent. Regarding headline risk to the markets, of late, U.S. Treasury yields have continued to march higher, and this has consistently produced reports about increased cost of capital and higher government borrowing expenses, which has put downward pressure on equities. While recently there are actually some positive reasons why yields have risen, nonetheless, as yields continue to creep higher, this creates more competition for stocks when it comes to investing dollars. For this reason and the subsequent effect of elevated borrowing costs, watching the action in the bond market, particularly the 10-Year U.S. Treasury yield, will be important in the weeks to come until this current rally it’s experiencing breaks.

As the market is becoming more and more fixated on the bond market and rising yields, this week will feature a noteworthy economic report that could either provide some relief or perhaps exacerbate the issue. On Friday the PCE inflation report for April will be revealed. March’s report showed the annual change in the PCE inflation rate had fallen to 2.3%, a significant drop from the prior month’s number of 2.7%. This was a nice sign for investors that despite all the worry surrounding tariffs that at least up to and until that point, tariff-related price increases had not hit consumers. Now, while these prices increases are almost certainly going to arrive eventually, the extent of them is still unknown given the fluid nature of current trade policy. Economists are expecting that the PCE report for April will show a YoY change in the inflation rate of 2.2%, marking a further cooling in inflation. Should this prediction play out, this will be welcomed by investors, and you’ll also likely see some downward pressure on bond yields as a result. However, should this report indicate a higher rate of inflation than expected, it would only be reasonable to expect the opposite results. With that said, given the pause on reciprocal tariffs against China, there is a feeling that even if we get a bad number here, investors may be willing to look past it as this report would be considered ‘stale data’ as it largely predates the tariff pause between the two nations.

Q1 earnings, despite fears heading into the reporting season, ended up being a very strong quarter of numbers! With 96% of S&P 500 companies now already having reported their Q1 results, a healthy 78% of them reported an earnings beat which is above most historical quarterly “beat rates”. With that said, this week is somewhat of a sneaky important earnings week. There are a few major companies that have not posted their Q1 results yet and are due this week. Clearly the most important report investors will be watching is Nvidia Corp., which will report after the bell on Wednesday. Also, on Wednesday after the close, Salesforce, Inc., will report their Q1 numbers. Then the following day, on Thursday, both Costco Wholesale Corp., & Dell Technologies Inc. will post their Q1 earnings results. So, while most all companies of note have already reported earnings, there are a few major companies still yet to go and this week will feature a number of them. This week will be big for the A.I.- related trade as well as the major, big-box retailer stocks as these related companies will likely trade in sympathy with Nvidia and Costco following their reports.

Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.

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