Weekly Trader's Outlook

If you read last week's blog you might recall that my overall outlook for this week was "volatile," a continued cautious stance on tech and a relative upbeat outlook on the $RUT/$SPXEW because of a better technical backdrop. I'd say my forecast was accurate on all three counts this week. Volatility ramped up this week as the VIX hit its highest levels since April, the SPX saw its first 2% down day in nearly a year and the COMP saw its biggest one-day decline since 2022. At the same time, the Russell 2000 gained 2.8% and the SPXEW increased 0.6% (at least at the time of this writing). What created this week's volatility bump? There were several culprits: a) a continued unwind of the "Yen carry trade" (long U.S. Dollar + short Yen combined with funds used to purchase popular tech stocks); b) GOOGL earnings, which beat estimates but perhaps not enough to appease investor expectations, along with scrutiny over higher CapEx spending on AI; and c) an uptick in recessionary risks, fueled by commentary from former New York Federal Reserve President Bill Dudley (more on this in the "Economic Data, Rates & the Fed" section below). Last week I mentioned that I was concerned about a "sell on the news" reaction from mega-cap tech because of lofty expectations, and this week Alphabet confirmed that. Not all tech results were bad however, as ServiceNow (NOW) beat estimates and demonstrated successful AI adoption from customers, and despite a Guggenheim downgrade to "Sell" back on July 8th. IBM and TXN also delivered reports that were well received by investors. So, in sum it appears that investors are still sorting out the impact of the Yen carry trade, higher anticipated capital spending on AI from mega-cap tech, a potential continuation of the rotation trade into small caps, and whether we've sold off enough to work thorough some of the excess sentiment/positioning within the familiar growth areas of the market. Next week should help provide some clarity as we'll be getting results from MSFT, META, AMZN and AAPL.

At the time of this writing (1:00 PM ET), all of the majors are trading at or near the highs of the day (DJI + 749, SPX + 79, COMP + 251) in what appears to be a technical bounce from the mid-week sell-off. It was a volatile week with lots of market moving headlines and next week will likely be more of the same. Not only do we have several mega-cap tech earnings reports to digest (from MSFT, META, AMZN, AAPL), but we also have an Federal Open Market Committee (FOMC) meeting, the monthly jobs report and a Bank of Japan (BOJ) Monetary Policy Meeting. For mega-cap tech, aside from guidance, investors will likely pay more attention to CapEx figures given what happened with GOOGL this week. I don't expect a lot of surprises from the FOMC meeting (i.e. data looks to be on track for a September cut) but the BOJ meeting could add some volatility as rate hike discussions are expected. This has the potential to impact the Yen carry trade which has hit tech stocks recently. Lastly, if next Friday's monthly jobs data shows an uptick in the Unemployment Rate to 4.2%, this would trigger the Sahm Rule (more on this in the "Economic Data, Rates & the Fed" section below). Yes, the technicals look bullish heading into next week, but there are a lot of other variables which could impact stocks. Therefore, my overall forecast for next week is "bullish" with a secondary expectation for "heightened volatility." It's possible that today is a 'dead cat bounce' and the selling pressure in stocks (tech more prominently) resurfaces next week, primarily driven by a continued unwind of the Yen carry trade.

Other Potential Market-Moving Catalysts:

Economic:

• Tuesday (July 30): Consumer Confidence, FHFA Housing Price Index, S&P Case-Shiller Home Price Index
• Wednesday (July 31): ADP Employment Change, EIA Crude Oil Inventories, Employment Cost Index, FOMC Rate Decision, MBA Mortgage Applications Index, Pending Home Sales
• Thursday (Aug. 1): Construction Spending, Continuing Claims, EIA Natural Gas Inventories, Initial Claims, ISM Manufacturing Index, Productivity – Preliminary, Unit Labor Costs - Preliminary
• Friday (Aug. 2): Nonfarm Payrolls, Nonfarm Private Payrolls, Unemployment Rate, Average Hourly Earnings, Average Workweek, Factory Orders

Earnings:

• Monday (July 29): McDonald's Corp. (MCD), On Semiconductor Corp. (ON), Welltower Inc. (WELL), Equity Residential (EQR)
• Tuesday (July 30): Proctor & Gamble Co. (PG), Merck & Co. (MRK), Pfizer Inc. (PFE), American Tower Corp. (AMT), Microsoft Corp. (MSFT), Advanced Micro Devices Inc. (AMD), Arista Networks Inc. (ANET), Starbucks Corp. (SBUX)
• Wednesday (July 31): T-Mobile US Inc. (TMUS), Boeing Co. (BA), Automatic Data Processing (ADP), Marriott International (MAR), Humana Inc. (HUM), Meta Platforms Inc. (META), Qualcomm Inc. (QCOM), ARM Holdings (ARM), Lam Research Corp. (LRCX)
• Thursday (Aug. 1): ConocoPhillips (COP), Eaton Corp. (ETN), The Cigna Group (CI), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Intel Corp. (INTC), Booking Holdings Inc. (BKNG)
• Friday (Aug. 2): Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Linde PLC (LIN)

This week's economic data was highlighted by a strong advanced reading on U.S. Q2 GDP and as expected inflation data that is likely good enough for a September rate cut from the Fed. Speaking of rate cuts, on Wednesday former NY Fed President Bill Dudley, who has long been in the "higher for longer" camp said that he's changed his mind and the Fed needs to cut rates now in order to avoid a recession. Dudley cited the McKelvey recession indicator, which is already in recession territory (0.399 vs. >0.30 threshold), and the Sahm Rule which is very close to the 0.50% threshold. Essentially, the Sahm Rule signals that a recession is underway if the three-month average unemployment rate rises 0.5% above the low point of the unemployment rate over the past 12 months, and we are currently at 0.43%. Here's some of the highlights of this week's economic reports:

• Personal Consumption Expenditure (PCE) Prices Index: headline rose 0.1% vs. +0.1% expected, while year-over-year PCE rose 2.5% vs. +2.5% expected. Core PCE increased 0.2% vs. +0.2% expected while year-over-year PCE rose 2.6%, slightly above the +2.5% expected. The Core PCE year-over-year rise represents the slowest increase since March of 2021.
• Q2 Gross Domestic Product (GDP) – Advanced Reading came in at 2.8%, above the 2.3% expected and up from the +1.4% in Q1. Inventories were a significant contributor to the advanced reading, adding 0.82% to the total gain.
• Initial Jobless Claims: 235K, below the 245K estimate and Continuing Claims declined to 1.851M from 1.867M last week. As a reminder, last week's Continuing Claims figure represented the highest level since November of 2021.
• Existing Home Sales dropped 5.4% from last month to 3.89M units, below the 4.05M expected. This represents the lowest level since December.
• The Atlanta Fed's GNPNow forecast for Q2 is currently 2.8% today.

This week two-year Treasury yields saw a significant drop, from 4.51% to the current 4.39%, which represents the lowest level since February. 10-year Treasury yields are essentially flat week-over-week at 4.21%.

Markets still believe that a September rate cut from the Fed is a near certainty. The Bloomberg probability of a September rate cut still sits at a theoretical 100%, same as last Friday. We'll see if Fed Chairman Jerome Powell agrees with markets at next week's FOMC meeting.

While it doesn't always turn out to be an accurate indicator, the negative divergence in the RSI that I highlighted over the past two weeks was a prequel to the ~3.5% pullback in the SPX over the past 10 days. The recent pullback took the index below its 50-day Simple Moving Average (SMA) for the first time since early May, but with today's recovery it appears that support may be kicking in here. While mega-cap tech will certainly have a significant influence on the performance of this market-cap weighted index next week (since four of the "Mag 7" are reporting earnings), the current set-up looks "net bullish" assuming support holds up at the 50-day SMA. Near-term technical translation: bullish

Like the SPX, the NDX flagged a negative divergence in the RSI a couple weeks back and you can see the subsequent performance in the chart below. Previously I mentioned how I was concerned about the stretched technical state and excessive optimism in technology, but now that we've pulled back meaningfully from the all-time highs in early July, the near-term set-up looks more bullish for two reasons: a) the index dropped 9.5% from July 10th to yesterday's low, which is nearly a "textbook" 10% correction; and b) the index appears to have found support at the 100-day SMA. Of course, earnings results from mega-cap tech behemoths MSFT, META, AMZN and AAPL next week will hold the keys to near-term direction, but from a technical perspective the set-up looks encouraging. Near-term technical translation: bullish

The Bloomberg chart below shows the current percentage of members within the S&P 500 (SPX), Nasdaq Composite (CCMP) & Russell 2000 (RTY) that are trading above their respective 200-day Simple Moving Averages. It was a volatile weak for stocks overall, so the market breadth in both the SPX and CCMP contracted this week. However, the RTY performed well, on a relative basis, and saw a slight uptick in market breadth. On a week-over-week basis, the SPX (white line) breadth decreased to 73.60% from 77.40%, the COMPX (blue line) ticked down to 50.91% from 51.45%, while the RUT (red line) moved up to 70.71% from 69.44%.

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 (182 today): Cal-Maine Foods Inc. (CALM - $0.05 to $71.00), Check Point Software Inc. (CHKP + $0.33 to $181.50), Crane Company (CR + $3.89 to $159.25), Duke Energy Corp. (DUK + $0.32 to $107.88), Lockheed Martin Corp. (LMT + $4.48 to $525.88), Philip Morris International Inc. (PM + $0.01 to $113.22), Spotify Technology S.A. (SPOT - $3.09 to $326.85)

This Week's Notable 52-week Lows (19 today): Helen of Troy Ltd. (HELE + $0.74 to $56.12), Lamb Weston Holdings Inc. (LW + $2.72 to $55.73), Las Vegas Sands Inc. (LVS - $0.30 to $39.03), Lululemon Athletica Inc. (LULU + $4.47 to $251.79), Polaris Inc. (PII + $1.74 to $80.77), Ulta Beauty Inc. (ULTA + $5.10 to $368.40), United Parcel Service Inc. (UPS + $1.80 to $128.88)