Weekly Trader's Outlook

Nvidia did its part to support the bullish AI secular growth story, but near-term technicals may be suggesting some digestion near highs is needed.

The Week That Was:

This week was all about the much-anticipated earnings report from Nvidia, and the AI-darling delivered on both earnings and guidance. I've mentioned previously that I felt the company needed to provide revenue guidance roughly ~$2B above analyst expectations (which is roughly what they've achieved over the prior three quarters to this one) to appease investor expectations and they pretty much hit that mark. Nvidia said that current quarter revenue is expected to be $28B, plus or minus 2% versus analyst expectations of $26.66B (per LSEG data). Taking this data point, along with CapEx guidance from mega-cap tech (who are customers of Nvidia) and it appears that the bullish AI infrastructure build out theme is still intact. At some point the infrastructure investment is going to pullback but we aren't there yet. Elsewhere, relatively hawkish Federal Open Market Committee (FOMC) Minutes and strong S&P manufacturing Purchasing Managers' Index (PMI) data reinforced the "higher for longer" theme regarding Federal Reserve policy (more on this in the "Economic Data, Rates & the Fed" section below). While the bulls may be enjoying the 2024 rally in stocks to fresh record highs, I think it's prudent to take a step back and respect the fact that the S&P 500 is up nearly 7% in five weeks, currently trading at a forward P/E of nearly 21 (well above the 10-year forward P/E of 17.7 per FactSet), and the outlook on inflation and Fed monetary policy is anything but certain. In short, we're currently priced for perfection, which could leave us vulnerable for some kind of a valuation 're-set' if any kind of an unexpected negative catalyst is introduced into the equation.

Outlook for Next Week:

At the time of this writing (1:00 p.m. ET), markets are largely holding gains (DJI + 68 to 39,134, SPX + 36 to 5,304, COMP + 180 to 16,916). Today's "bounce back" from yesterday's sell-off appears to be assisted by this morning's cooler-than-expected inflation expectations from this morning's final reading of May's University of Michigan Consumer Sentiment. Next Friday's (monthly) Personal Consumption Expenditures (PCE) Price Index will give us another data point on inflation and has the potential to move markets, one way or the other. Having noted that, while today's price action is encouraging for the bulls, I'm still cautious from a near-term technical perspective (more on this in the "Technical Take" section below). Therefore, my forecast for next week is "slightly bearish." What could challenge this outlook? Since inflation data points and bond yields still seem to be driving near-term sentiment, there are several potential data points which could lead to bullish price action next week–Tuesday's inflation expectations within the Consumer Confidence report, Thursday's (quarterly) PCE data from the second reading on Q1 GDP and Friday's (monthly) PCE report.

Other Potential Market-moving Catalysts:

Economic:

  • Tuesday (May 28): Consumer Confidence, FHFA Housing Price Index, S&P Case-Shiller Price Index
  • Wednesday (May 29): Fed's Beige Book, MBA Mortgage Applications Index
  • Thursday (May 30): Adv. International Trade in Goods, Adv. Retail Inventories, Adv. Wholesale Inventories, Continuing Claims, EIA Crude Oil Inventories, EIA Natural Gas Inventories, GDP – Second Estimate, GDP Deflator – Second Estimate, Initial Jobless Claims, Pending Home Sales
  • Friday (May 31): Chicago PMI, PCE Prices, PCE Prices – Core, Personal Income, Personal Spending

Earnings:

  • Tuesday (May 28): Hello Group Inc. (MOMO), Baozun Inc. (BZUN), HEICO Corp. (HEI), CAVA Group Inc. (CAVA), Box Inc. (BOX)
  • Wednesday (May 29): DICK's Sporting Goods Inc. (DKS), Abercrombie & Fitch Co. (ANF), Chewy Inc. (CHWY), Salesforce (CRM), Agilent Technologies Inc. (A), HP Inc. (HPQ), Pure Storage Inc. (PSTG), Nutanix (NTNX), Okta (OKTA), UiPath (PATH)
  • Thursday (May 30): Dollar General Corp. (DG), Hormel Foods Corp. (HRL), Best Buy Inc. (BBY), Burlington Stores Inc. (BURL), Costco Wholesale Corp. (COST), Dell Technologies (DELL), Marvell Technologies Inc. (MRVL), Veeva Systems Inc. (VEEV), MongoDB Inc. (MDB), Zscaler Inc. (ZS)
  • Friday (May 31): Genesco Inc. (GCO), Frontline PLC (FRO)

Economic Data, Rates & the Fed:

It was a light week regarding the number of economic data points released. However, there were a couple of data points that impacted the narrative around the Fed's fight against inflation and bond yields. First, we got the FOMC Minutes on Wednesday which showed that some members of the committee were discouraged with the progress against inflation and either questioned whether policy was restrictive enough or were willing to maintain current policy for a longer timeframe. However, the minutes were from the FOMC meeting back on April 30-May 1, and doesn't incorporate the weak Nonfarm Payrolls report on May 3rd or the consumer price index/producer price index (CPI/PPI) data from last week, so the perspective could be considered stale. Then, on Thursday the S&P Global US Manufacturing PMI showed an acceleration in business activity as the Composite PMI Output Index jumped to 54.4, above the 51.1 economists had expected and up from 51.3 in the prior month. This represented the highest reading since April of 2022. The increase was primarily driven by the services sector, which came in at 54.8, above the 51.3 expected and up from 51.3 in April.

From an encouraging sign on the inflation front, this morning's final read on the University of Michigan consumer sentiment for May (69.1 vs. 67.5 estimate and above the 67.4 preliminary reading) showed an improvement on inflation expectations–one-year inflation expectations came in at 3.3%, down from the preliminary reading of 3.5% and five-year inflation expectations came in at 3.0%, lower than the 3.1% preliminary reading.

Bond yields saw a slight uptick this week, primarily driven by yesterday's PMI data referenced above. On a week-over-week basis, yields on two-year Treasuries are up ~11 basis points to 4.937% while yields on the 10-year are up slightly, from 4.42% to the current level of 4.469%.

Market hopes around the potential for Fed rate cuts continue to be pushed out in time. Last Friday the probability of a September rate cut was 82% and it has dropped all the way down to the current level of 58%. This represents the lowest probability for that month of the year, conveying the "higher for longer" theme. I find it remarkable that that stock market has continued to climb higher into record territory despite multiple re-sets lower around Fed rate cut expectations.

Technical Take:

S&P 500 Index (SPX + 38 to 5,306)

From a bullish perspective the S&P notched a fresh all-time high yesterday but following yesterday's sell-off the index is essentially flat on the week. More importantly, yesterday's long red candle created a bearish engulfing weekly candle (meaning the candle "engulfed" the intraday ranges of the prior five trading days), which makes me cautious near-term. Today we've got an "inside day," which suggests some consolidation of yesterday's move and a slowing of the momentum of the SPX uptrend. Nothing is guaranteed here, but the way I translate yesterday's candle is this: Until the SPX moves above yesterday's open (and all-time high) of 5,340 I'm in the near-term bearish camp. Near-term technical translation: bearish.

Source: ThinkorSwim trading platform

Past performance is no guarantee of future results.

Nasdaq Composite Index ($COMP + 175 to 16,911)

The Nasdaq Composite also recorded a bearish engulfing candle yesterday, but it was daily, not weekly. Yesterday's open represented an all-time high and the uptrend is still intact, but I'm still a little in the cautious camp on this index. As with the SPX, if it can move above yesterday's all-time high of 16,996 this would shift my technical take to bullish. Near-term technical translation: slightly bearish.

Source: ThinkorSwim trading platform

Past performance is no guarantee of future results.

Market Breadth:

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. Over the past two weeks (I'm doing a comparison to May 10th since I didn't write a blog last Friday) we've seen a modest contraction in breadth, primarily driven by yesterday's sell-off. Compared to Friday, May 10th, the SPX (white line) breadth moved down to 73.29% from 77.91%, the COMPX (blue line) decreased to 44.84% from 47.88%, and the RUT (red line) dropped to 53.61% from 58.62%.

Source: Bloomberg L.P.

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 (30 today): Amphenol Corp. (APH + $1.19 to $137.59), Decker's Outdoor Corp. (DECK + $104.07 to $1,008.72), Dycom Industries (DY + $1.91 to $179.13), First Solar Inc. (FSLR + $13.44 to $263.25), Leidos Holdings Inc. (LDOS + $0.38 to $150.15), Moderna Inc. (MRNA - $0.46 to $163.55), Sprouts Farmers Market (SFM + $0.86 to $81.55)

This Week's Notable 52-week Lows (37 today): Amerisafe Inc. (AMSF - $0.01 to $44.38), Bristol-Myers Squibb Company (BMY - $0.32 to $41.22), Cable One Inc. (CABO + $1.08 to $54.82), Five9 Inc. (FIVN - $0.29 to $50.22), Immunocore Holdings PLC (IMCR - $4.49 to $43.49), Magna International Inc. (MGA + $0.14 to $44.90), Whirlpool Corp. (WHR + $0.26 to $86.72)