Weekly Trader's Outlook

If you read the last week's blog, you might recall that my forecast for this week was "Slightly Bullish," citing bullish technicals on the Russell 2000 (RUT) and the S&P Equal-Weight Index (SPXEW), driven by the continuation of the broadening trade. While the market-cap weight S&P 500 (SPX) and Nasdaq Composite ($COMP) are on track to be slightly down on the week, the SXPEW is on track to be up ~0.80%, while the RUT is on track to be up a healthy 2.4%. The bifurcation in performance among the majors suggests that the "rotation trade" of 2026 continued to play out this week.

Speaking of bifurcation, look no further than the technology sector. Divergence continues to develop within mega-cap tech, software and chip stocks, as investors attempt to discern how AI adoption will potentially disrupt business models from former leaders. Last week I noted the recent divergence in mega-cap tech (AAPL, MSFT, META relative underperformers, GOOGL, AMZN winners), and to some extent within the semiconductor space (semiconductor equipment manufacturers and memory stocks outperforming), and this week software stocks came under pressure. Multiple familiar large-cap software stocks have fallen to fresh 52-week lows this week: Adobe Systems (ADBE), Atlassian Corp. (TEAM), Docusign (DOCU), HubSpot (HUBS), Monday.com (MNDY), Salesforce (CRM), ServiceNow (NOW), Wix,.com (WIX) and Workday (WDAY). The bearish narrative that has been developing is that AI companies like OpenAI and Anthropic will disrupt traditional software business models. However, it should be noted that several analysts came out in defense of these traditional players, calling the selling overdone and potentially a buying opportunity. Separately, a strong beat and raise quarter from Taiwan Semiconductor helped validate healthy demand in the AI infrastructure buildout, which provided a lift to most chip stocks yesterday.

Elsewhere, markets received a solid dose of economic this week, and the data mostly reaffirmed the notion of a strong economy. While inflation remains relatively sticky, but not rising, consumer spending remains strong (even if is due to the top end of the K-shaped economy), layoffs remain below trend, and Q4 GDP is tracking strong (more on this in the "Economic Data, Rates & the Fed" section below). Furthermore, commentary from the big banks, which reported earnings this week, suggest the consumer is resilient and lending to small businesses is firm.

At the time of this writing (2:45 p.m. ET), all the major indices are trading slightly higher, roughly in the middle of their respective intraday ranges at the time of this writing (DJI + 7, SPX + 7, $COMP + 20, RUT + 9). Today's standout is the yield on the 10-year, which is currently 4.23%, the highest level since last September. The push higher in the 10-year appears to be related to Kevin Warsh flipping into the frontrunner position as the next Federal Reserve Chair today, but it's unclear how sustainable the move will be. If 10-year yields continue to creep higher next week, this could lead to a profit taking pullback in the RUT, especially given the strong rally, and the near-term overbought status in small caps (more on this in the "Technical Take" section below). Additionally, if there is some unwinding of the rotation trade next, investors may move back into mega-cap tech (remember that the tech sector is still slated to deliver the largest contribution to S&P earnings growth this quarter, and by a large margin). Assuming longer-term yields stay relatively contained, investors will likely remain focused on Q4 earnings, along with the personal consumption expenditures (PCE) prices report next week. As for next week, given how far the rotation trade has run, along with the 73 RSI in the RUT, it seems likely that stocks could be due for a rest. At a high level, this means choppy, sideways to potentially down consolidation. Therefore, I'm providing a "Neutral to Slightly Bearish" forecast for next week. What could challenge my forecast? A continuation of the broadening trade and/or exceptional Q4 earnings guidance could translate into weekly gains for stocks.

• Monday (Jan. 19): -no reports-
• Tuesday (Jan. 20): -no reports-
• Wednesday (Jan. 21): Building Permits, Construction Spending, Housing Starts, MBA Mortgage Applications Index, Pending Home Sales
• Thursday (Jan. 22): Continuing Claims, EIA Crude Oil Inventories, EIA Natural Gas Inventories, Q3 GDP – Revised (3rd estimate), Initial Claims, PCE Prices, Personal Income, Personal Spending
• Friday (Jan. 23): University of Michigan Consumer Sentiment - Final
   

• Monday (Jan. 19): -no reports-
• Tuesday (Jan. 20): D.R. Horton Inc. (DHI), Fastenal Co. (FAST), Fifth Third Bancorp (FITB), KeyCorp (KEY), Interactive Brokers Group Inc. (IBKR), Netflix Inc. (NFLX), 3M Co. (MMM), United Airlines (UAL), US Bancorp (USB), Zions Bancorporation (ZION)
• Wednesday (Jan. 21): CACI International Inc. (CACI), Charles Schwab Corp. (SCHW), Halliburton Co. (HAL), Johnson & Johnson (JNJ), Kinder Morgan Inc. (KMI), Knight-Swift Transportation Holdings (KNX), Pinnacle Financial Partners Inc. (PNFP), Prologis Inc. (PLD), Rli Corp. (RLI), TE Connectivity PLC (TEL), Travelers Companies Inc. (TRV), Truist Financial Corp. (TFC)
• Thursday (Jan. 22): Abbott Laboratories (ABT), Alcoa Corp. (AA), Capital One Financial Corp. (COF), CSX Corp. (CSX), East West Bancorp (EWBC), Freeport-McMoRan Inc. (FCX), GE Aerospace (GE), Huntington Bancshares (HBAN), Intel Corp. (INTC), Intuitive Surgical Inc. (ISRG), McCormick & Company (MCK), Procter & Gamble Co. (PG)
• Friday (Jan. 23): Booz Allen Hamilton Holding Corp. (BAH), Comerica Inc. (CMA), First Citizens BancShares (FCNCA), SLB NV (SLB), Webster Financial Corp. (WBS)

There was a heavy dose of economic data for investors to digest this week, highlighted by the monthly inflation and retail sales data. Regarding inflation, the consumer price index (CPI) was slightly cooler on the core side, as was the core producer price index (PPI) on the month-over-month reading, but the PPI annual readings came in a little warm. However, it's worth noting that these inflation readings should be taken with a grain of salt given the limited data availability due to last year's government shutdown. The good news for the bulls is that the economy remains firm, as retail sales beat estimates, weekly Initial Claims remain subdued and the Atlanta Fed Nowcast for Q4 GDP was revised up to 5.3% from 5.1% on Wednesday. Here's the breakdown from this week's reports:

• CPI: Both the headline month-over-month (MoM) and year-over-year (YoY) figures were in-line with estimates (+0.3% and +2.7%, respectively), but both the core figures came in 0.1% below expectations (+0.2% and +2.6%, respectively).
• PPI: Headline MoM increased 0.2% (as expected) while the core MoM was 0.0% (below the 0.2% expected). However, on a YoY basis the headline was +3.0%, hottest since July, and the core YoY was also 3.0%. The YoY core PPI excluding trade services was up 3.5%, which represents the largest annual gain since March.
• Retail Sales (November): The headline figure came in above estimates (0.6% vs. +0.4% expected), as did the ex-autos figure (+0.5% vs. +0.3% expected). On a YoY basis Retail Sales rose 3.3%, which was ahead of the +2.7% expected. The Control Group, which excludes volatile categories (auto dealers, gas stations, building materials, etc.) and feeds directly into GDP, was in-line with estimates (+0.4% vs. +0.4% expected).
• New Home Sales: Came in at 737K in October, down 0.1% MoM, but above the 716K expected.
• Existing Home Sales: Increased 5.1% MoM to 4.35M and above the 4.10M expected.
• Empire State Manufacturing: 7.7 vs. 0.0 est.
• Philadelphia Fed Index: 12.6 vs. -6.6est.
• Export Prices: Increased 0.4% over the two months from September to November.
• Import Prices: Increased 0.4% over the two months from September to November.
• Initial Jobless Claims: Initial applications for US jobless benefits decreased 9K from last week to 198K, which was well below the 212K economists had expected. Continuing Claims fell to 1.884M from 1.903M week-over-week.
• EIA Crude Oil Inventories: +3.39M barrels
• EIA Natural Gas Inventories: -71 bcf
• The Atlanta Fed's GDPNow "nowcast" for Q4 GDP was revised up to 5.3% on Wednesday from 5.1% on January 9th, driven by upward revisions in the nowcasts of Q4 real personal consumption expenditures growth (3.1% vs. 3.0%), Q4 real gross private domestic investment growth (5.1% vs. 4.8%) and Q4 real government expenditures growth (1.6% vs. 1.3%).

The U.S. Treasury yield curve saw some flattening on a week-over-week basis. Compared to last Friday, two-year Treasury yields are up ~5 basis points (3.597% vs. 3.54%), while 10-year yields are higher by ~3 basis points (4.205% vs. 4.171%), and 30-year yields are essentially flat (4.811% vs. 4.819%). What's interesting to note is that yields on the 10-year are attempting a move above 4.20% today, which has been a level where buyers have stepped in over the past six weeks. Perhaps today's news that Kevin Warsh has emerged as a frontrunner (over Kevin Hassett) to become the next Fed Chair is influencing yields today, but I think we'll have to wait until next week to see if there is any follow-through move higher before drawing conclusions.

Market expectations for rate cuts from the Federal Reserve continued to diminish over the past week, likely driven by this week's relatively benign inflation data and firm economic data. Per Bloomberg, the probability of a 25-basis-point cut from the Fed in March eased to 23% from 30%, April is down to 39% from 49%, and June is now down to 80% from a theoretical 100%.

While the market-cap weighted S&P 500 is slightly lower on the week, the S&P 500 Equal Weight index (SPXEW) is on track for a 0.80% weekly gain. The relative outperformance in the SPXEW reflects a continuation of the "rotation trade," along with softness in mega-cap tech. Of course, money flow can shift back to mega-cap tech at any time, and have often done so in the past, but for now the steady march higher in the SPXEW is technically bullish.

Near-term technical translation: bullish

Also validating the "broadening trade" is the continued outperformance in the Russell 2000 index (RUT), which is the best performing index among the majors so far this year. Last week I referenced the Relative Strength Indicator (RSI), which was at a relatively benign 66 last week, but today the index sits at roughly 73 which above the "overbought" threshold of 70. Keep in mind that the RSI isn't a timing tool, so it won't predict a pullback once a certain level is hit, but it does signal that some mean reversion may be on the horizon. Therefore, while the intermediate-term trend is bullish, I'd be on the lookout for a potential pullback in the near-term.

Technical translation: intermediate-term bullish, near-term cautious

The crypto market started off the week with some bullish price momentum, driven by optimism that a key piece of crypto legislation would gain traction this week, but ran into a snag after Coinbase CEO Brian Armstrong pulled his support late Wednesday. The bill, known as the "Clarity Act," is intended to create a regulatory framework for cryptocurrencies, define when crypto tokens are classified as securities, commodities or fall into other categories, and provide clarity around the roles of the Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission. The Senate Banking Committee was scheduled to debate amendments to the bill on Wednesday, but that meeting was canceled late Wednesday after Armstrong said that the bill had "too many issues" and could not support the current draft. Armstrong stated, "We'd rather have no bill than a bad bill," claiming that the amendments essentially "kill" the ability for firms like his to offer rewards to customers holding stablecoins. A primary concern from traditional banks is that higher yielding stablecoins, via rewards, could result in a flight of deposits, which is a primary source of funding for most banks. CEO of the Blockchain Association Summer Mersinger stated, "On complex issues like digital asset market structure, moments like this can be a healthy part of policymaking, allowing time for additional deliberation."

The Bloomberg chart below shows the current percentage of members within the S&P 500 (SPX) and Nasdaq Composite (CCMP) that are trading above their respective 200-day Simple Moving Averages (SMA). In short, both the S&P 500 and Nasdaq Composite are on track for modest weekly losses, yet market breadth expanded on both indices, which suggests broader participation underneath the surface of the index level. Compared to last Friday's, the SPX (white line) breadth jumped to 70.88% from 68.07% and the CCMP (blue line) rose to 52.02% from 50.80% (note: RUT is excluded from this week's chart due to data inaccuracies).

Market breadth attempts to capture individual stock participation within an overall index, which can help convey underlying strength or weakness of a move or trend. Typically, broader participation suggests healthy investor sentiment and supportive technicals. There are many data points to help convey market breadth, such as advancing vs. declining issues, percentage of stocks within an index that are above or below a longer-term moving average, or new highs vs. new lows.

This Week's Notable 52-week Highs (115 today): Alcoa Corp. (AA - $1.66 to $62.15), Archer Daniels Midland (ADM - $0.66 to $65.91), Casey's General Store Inc. (CASY - $1.85 to $635.51), Dollar General Corp. (DG - $1.26 to $150.47), Halliburton Co. (HAL - $0.28 to $32.50), Intel Corp. (INTC - $0.30 to $48.02)

This Week's Notable 52-week Lows (54 today): Adobe Systems Inc. (ADBE - $6.80 to $297.29), Box Inc. (BOX - $0.14 to $26.43), Docusign Inc. (DOCU - $1.62 to $58.07), GoDaddy Inc. (GDDY - $1.83 to $105.52), HubSpot Inc. (HUBS - $14.95 to $314.28), ServiceNow Inc. (NOW - $3.00 to $128.17)