After Thursday’s dramatic intraday upside reversal, the market followed through on Friday to the upside and in the process put in its best day in six weeks. This type of price action shows that for the time being the market remains in a trading range with support at the 200-day moving average around 3940 holding nicely on the downside while upside resistance seems to now being dependent on the perception of the latest inflation and future Federal Reserve actions.
Things started out higher and just kept pushing and pushing upward right into the close with the result that the Dow ended up by 387 to 33,390, led by gains in the usual upside winners, namely BA, CAT, GS, HD in addition to MSFT and V. This led to the first higher week for the Dow in the past five.
The S&P as usual, always does better on the higher days because it gets help from the Nasdaq highly weighted technology stocks and it gained 64 to end at 4045 for its first winning week out of the last four. The Nasdaq as usual is the upside hero on these types of days and ended 226 higher at 11,689.
The Russell 2000 Index of small stocks advanced by 25 up to 1928 while the VIX fell right into what should be support in the 18 level and if it breaks this on the downside, it could result in further gains.
Once again, early in the year, the market rallied on hopes that cooling inflation would get the Fed to take it easier on its hikes to interest rates. Last month, momentum swung the other way to the downside and stocks fell after reports on the economy came in hotter than expected. They included data on the jobs market, consumer spending and inflation itself at multiple levels.
The strong data raised concerns about continued upward pressure on inflation. That forced investors to abandon rate cut hopes for this year and raised expectations for how high rates would go.
On Friday, more data showed up to indicate that the economy is in better shape than thought, as the January ISM Services report coming in a little higher than expectations. This is a good sign for the economy and helps calm worries about an imminent recession, particularly when manufacturing has been struggling. But it also could add pressure on inflation.
Instead of sending stocks lower and yields higher, as stronger-than-expected data did much of last month, markets reacted in the opposite way, go figure.
The yield on the 10-year Treasury fell back to 3.96% from 4.06% late Thursday. It is a respite from its move higher over the last month as expectations rose for a firmer Fed.
Underneath the surface of the services report were some potentially encouraging bits for inflation. Prices are still rising for prices paid by services organizations, but the growth decelerated in February.
The next big event regarding what the Fed might or might not do will come this Friday with the February jobs report which is supposed to show a gain of around 200,000 as opposed to the huge 517,000 gain the prior month. Also, there is Fed Chair Powell testifying to Congress tomorrow and Wednesday, so this has the potential to move things one way or the other as well depending on what he says the outlook for inflation and further rate hikes might be.
Last month, the Fed dialed down the size of its rate increases to only 25 basis points and highlighted progress being made in the battle to get inflation lower. It also earlier suggested just two more increases to rates may be on the way. But the strong reports since then have raised worries that the Fed could hike at least three more times.
All the worries have come while expectations for corporate profits have been swinging lower. Still-high inflation and rates are eating into earnings for big companies. Retailers in particular have been saying they see some of their customers struggling.
COST on Friday reported stronger profit for its latest quarter than expected, but its revenue fell short of forecasts and as a result its stock fell.
On the other hand, AVGO gained after it beat expectations for quarterly profit and revenue.
Earnings this week include: today CIEN higher, TRIP; Tuesday – DKS, CRWD; Wednesday – CPB, MONGO; Thursday – ORCL, ULTA.
Economic reports will see: today – January factory orders fell by 1.6% due to weakness in aircraft; Wednesday – January trade deficit, Fed Beige Book; Friday – February jobs report which is expected to show a gain of around 200,000, unemployment rate of 3.4%.
Donald M. Selkin
Chief Market Strategist
Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.