Weekly Trader's Outlook

If you read last week's blog you might recall that my forecast for this week called for "higher volatility" with an overall "slightly bearish" outlook. At the time of this writing (12:15 ET) the S&P 500 is roughly flat on the week, so my slightly bearish outlook was wrong, but we certainly saw an uptick in volatility. The Cboe Volatility Index (VIX) touched 22 on Monday of this week after a China-based AI start-up company called DeepSeek said that its open-source AI chatbot was able to emulate the performance of OpenAI's ChatGPT at a fraction of the cost. The news hit AI-related stocks on concerns that the amount of computing power for AI had been overstated and therefore less investment in AI infrastructure and power consumption will be needed. Tech stocks subsequently recovered from Monday's shockwaves as the narrative was redirected as a positive development since lower costs will make it easier for companies to develop AI, thereby resulting in faster and wider adoption. While we don't know what the longer-term implications of what "lower cost, higher competition" potentially means for AI-related stocks, investors appear to have taken a "glass half full" stance based on the recovery that has taken place since Monday (however, NVDA is still down ~12% on the week).

The timing of the DeepSeek news interesting since we received quarterly earnings from four of the "Mag 7" stocks this week–META, MSFT, TSLA and AAPL. Companies such as MSFT and META have been increasing CapEx on AI development over the past several quarters and investors have largely been relatively patient on the potential payoff from the heavy spending. Both Microsoft and Meta reiterated their increased CapEx budgets (from $44B in 2024 to $80B in 2025 for MSFT and from $40B in 2024 to $60-65B in 2025 for META), delivered strong results, but provided soft guidance. META hit an all-time high following the report while MSFT sold off due to lackluster Azure growth guidance. Tesla missed analysts estimates but investors sent the shares higher after CEO Elon Musk promised to launch cheaper EV models in the first half of this year and start testing autonomous ride-hailing service in June. Last night AAPL reported a mixed quarter, which included a widely anticipated iPhone sales miss, but provided an encouraging outlook and the stock is trading higher this morning. Based on the post-earnings response from this week's mega-cap tech earnings reports it appears investors are still optimistic about growth prospects within the technology space and the potential for AI to boost bottom lines.

Lastly, yields and inflation are still important to the markets (see "Economic Data, Rates & the Fed" section below) and while dis-inflationary trends may not be sufficient to prompt rate cuts from the Federal Reserve just yet, longer-term treasury yields have pulled back from early January highs which is net-bullish for stocks. In my view, we don't necessarily need rate cuts from the Fed right now given the firm economic data, but 10-year yields will likely need to stay below the recent high (~4.80%) for stocks to continue to push higher into all-time high territory.

At the time of this writing (1:40 p.m. ET), stocks are mixed and off the highs (DJI - 198, SPX + 3, COMP + 93) and bond yields are creeping slightly higher which appears to be driven by some conflicting reports around U.S. tariffs on Canada and Mexico. About an hour ago Reuters reported that the February 1st deadline was going to be moved out to March 1st, but the White House subsequently denied that report. The choppy price action suggests to me that fiscal policy, and more specifically tariffs, and the potential impact on treasury yields still matters to the markets. Another potential yield influencer is next Friday's monthly jobs report. Recall that last month's Nonfarm Payrolls report came in well above estimates (256K vs. 165K estimate), yields moved higher, and stocks sold off. I'm not suggesting that will happen again because we don't know if we'll get a strong report and we could get some downward revisions to the prior month, but it's a potential market-moving catalyst and bears monitoring. We're also going to get plenty of key Q4 earnings reports from the likes of Amazon, Alphabet, Palantir, AMD, Arm Holdings and Uber, so I see the potential for higher volatility continuing next week. The recovery that stocks staged this week following Monday's AI scare speaks to the bullish bias in the price action (i.e. buy the dip). However, the technicals are a little iffy when looking at the Dow or the Russell 2000 which has moved back below the 50-day SMA following the intraday tariff headlines (more on this in the "Technical Take" section below). Therefore, my primary forecast for next is for "higher volatility" given the potential catalyst discussed above. Even with the iffy technicals on the DJI/RUT, I don't have a clear directional bias for next week, we could just be in for some choppy price action. What could challenge my outlook? The trajectory of bond yields will likely tell the story. If we don't get any new tariff announcements and yields remain subdued, stocks may melt higher, and volatility would therefore be subdued.

Other Potential Market-Moving Catalysts:

Economic:

• Monday (2/3): Construction Spending, ISM Manufacturing Index
• Tuesday (2/4): Factory Orders
• Wednesday (2/5): ADP Employment Change EIA Crude Oil Inventories, ISM Services MBA Mortgage Applications Index, Trade Balance
• Thursday (2/6): Continuing Claims, EIA Natural Gas Inventories, Initial Claims, Productivity-Preliminary, Unit Labor Costs-Preliminary
• Friday (2/7): Average Workweek, Average Hourly Earnings, Consumer Credit, Nonfarm Payrolls, Unemployment Rate, University of Michigan Consumer Sentiment – Preliminary, Wholesale Inventories

Earnings:

• Monday (2/3): IDEXX Laboratories Inc. (IDXX), Tyson Foods Inc. (TSN), Palantir Technologies (PLTR), NXP Semiconductors (NXPI), Clorox Co. (CLX)
• Tuesday (2/4): Merck & Co. (MRK), PepsiCo Inc. (PEP), Pfizer Inc. (PFE), Spotify Technology SA (SPOT), Alphabet Inc. (GOOGL), Advanced Micro Devices Inc. (AMD), Amgen Inc. (AMGN), Chipotle Mexican Grill (CMG)
• Wednesday (2/5): Walt Disney Co. (DIS), Boston Scientific Corp. (BSX), Uber Technologies (UBER), Arm Holdings PLC (ARM), MicroStrategy Inc. (MSTR)
• Thursday (2/6): Eli Lilly & Co. (LLY), AstraZeneca PLC (AZN), Honeywell International (HON), ConocoPhillips (COP), Bristol-Myers Squibb Co. (BMY), Amazon.com Inc. (AMZN), Fortinet Inc. (FTNT), Pinterest (PINS), Expedia Group Inc. (EXPE)
• Friday (2/7): Fortive Corp. (FTV), Cboe Global Markets Inc. (CBOE), Kimco Realty Corp. (KIM)

It was a busy week on the economic front and the data was a little mixed. In short, the Fed conveyed a patient stance regarding monetary policy at the Federal Open Market Committee (FOMC) meeting, the monthly PCE inflation data was essentially in line, jobless claims were benign and the advanced reading on Q4 GDP was a little soft. Here's the breakdown from this week's reports:

• FOMC Meeting: The Federal Reserve kept the fed funds rate unchanged at 4.25-4.50%. Powell said the Fed is in no hurry to adjust policy, citing a strong economy and "somewhat elevated" inflation.
• Personal Consumption Expenditures (PCE) Price Index: Headline month-over-month (MoM) increased 0.3% (in line with estimates), putting the year-over-year (YoY) gain at 2.6%, 0.2% higher than November but in-line with estimates. Core PCE increased 0.2% MoM and 2.8% YoY, both in line with estimates.
• Consumer Confidence: Dropped to 104.1 in January from 109.5 in December, driven by concerns around the job market, inflation and interest rate policy. 
• GDP – Advanced Reading: The economy expanded at a 2.3% annualized pace in Q4, below the +2.5% economist had expected. For the full year GDP increased 2.8% versus +2.9% in 2023.
• Chicago Purchasing Managers' Index (PMI): Rose to 39.5 from 36.9 in December, marking the first increase in four months (note: a reading above 50.0 indicates expansion, below 50.0, contraction).
• Initial Jobless Claims: Decreased to 207K from 223K in the prior week and below the 220K expected. Continuing Claims decreased 42K to 1.858M from 1.90M last week and below the 1.89M economist had expected.
• The Atlanta Fed's GDPNow "nowcast" for Q1 GDP was revised up to 2.9% from +2.3% yesterday.

U.S. Treasury yields are modestly lower on the week, which likely helped the intra-week rebound in stocks. Compared to last Friday, two-year Treasury yields are down ~7 basis points to the current 4.199% from 4.263% while 10-year yields are ~12 basis points lower to the current 4.506% from 4.626%.

Near-term expectations around potential rate cuts from the Fed eased some week-over-week following the Powell's patient tone out of the FOMC meeting. Looking at the Bloomberg probabilities, the probability around a March rate cut dropped to 16% from 27% last Friday. However, markets are still expecting somewhere between one to two 25-basis-point cuts in 2025.

Normally I touch on the S&P technicals but I thought I'd mention the Dow Jones since it appears to be up against a key near-term resistance level. The all-time closing high for the $DJI is 45,014 on December 4th. The index subsequently pulled back to its 100-day SMA late last year and has managed to rally back towards the prior highs this year. However, over the past four days, including today, the index has struggled to meaningfully push above the 45,000 level. While the longer-term uptrend remains intact, the near-term technicals are slightly bearish due to this resistance. Technical translation: long-term bullish, near-term slightly bearish

The Russell 2000 index (RUT) is roughly flat week-over-week but appears to be on the verge of an incremental bullish development. While I don't have the luxury of seeing where the RUT will close today, if it can close above the 50-day Simple Moving Average it would be the first time the index has done so since the December FOMC meeting. If the RUT can't close above the 50-day SMA today the near-term outlook flips to bearish (i.e. prior resistance becomes support). Near-term technical translation: bullish, assuming a close today above 50-day SMA

Yesterday the U.S. Securities and Exchange Commission (SEC) approved the NYSE's proposal to list shares of a new hybrid crypto ETF from Bitwise. This new hybrid investment product gives investors exposure to the spot price of both Bitcoin (BTC) and Ethereum (ETH) in one regulated fund. The SEC decided to approve the new product on an accelerated basis, reasoning that the proposal bears similarities to existing spot BTC and ETH ETFs.

The Bloomberg chart below shows the current percentage of members within the S&P 500 (SPX), Nasdaq Composite (CCMP) and Russell 2000 (RTY) that are trading above their respective 200-day Simple Moving Averages (SMA). Stocks had a volatile week, but market breadth was able to register some modest improvement. On a week-over-week basis, the SPX (white line) breadth moved up to 64.20% from 62.20%, the CCMP (blue line) is essentially flat at 48.11% versus 48.95%, and the the RTY (red line) ticked up to 55.06% from 54.72%.

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 (83 today): Alaska Air Group (ALK + $0.04 to $74.47), Capital One Financial Corp. (COF + $1.41 to $206.03), Goldman Sachs Group (GS + $0.04 to $645.74), Meta Platforms Inc. (META + $15.14 to $702.14), Royal Caribbean Cruises Ltd. (RCL - $1.83 to $272.95), Starbucks Corp. (SBUX - $0.01 to $108.99)

This Week's Notable 52-week Lows (41 today): Ashland Inc. (ASH + $1.24 to $64.98), Cable One Inc. (CABO + $0.02 to $302.93), Comcast Corp. (CMCSA + $0.50 to $33.75), Danaher Corp. (DHR + $4.20 to $227.28), Edison International Inc. (EIX - $0.34 to $53.72), ON Semiconductor (ON - $0.03 to $53.24)