Weekly Trader's Outlook

If you read last week's blog you might recall that my outlook for his week was slightly bearish with expectations for an uptick in volatility, noting the potential for a post-Federal Open Market Committee (FOMC) "sell on the news" pullback. While my forecast directionally for both stocks and volatility was accurate, I certainly didn't expect stocks to see their largest one-day drop since early August following the Federal Reserve's hawkishly revised rate outlook (more on this in the "Economic Data, Rates & the Fed" section below). Markets have largely been able to digest lowered expectations around Fed rate cuts all year, but Wednesday's sell-off was probably spurred on by the technical significance of the 10-year yield moving above 4.50% and the U.S. Dollar (DXY) move above the 107 level. The recent pick-up in the more speculative areas of the market heading into that meeting also likely exacerbated the sharp sell-off in stocks and spike in volatility (the VIX hit 28 on Wednesday). However, this morning's cooler-than-expected Personal Consumption Expenditures (PCE) report, along with relatively dovish commentary from Federal Reserve Bank of Chicago President Austan Goolsbee are helping yields cool off some, leading to a bounce-back rally in stocks. The "performance chasing" tendency from fund managers during the month of December is likely adding to some of today's money flow into stocks. Outside of the concerns around potentially higher yields and stickier inflation, the U.S. economic data was strong this week. Therefore, the bull thesis is still intact, but likely as long as yields on the 10-year remain under the key 5.0% level. Remember that as yields climb higher the equity risk premium deteriorates, borrowing costs go higher (for the consumer, businesses and the government) and fixed income becomes a more attractive alternative to stocks. Therefore, with the S&P's forward P/E of roughly 22, Q4 corporate earnings are going to need to deliver here in about a month to justify current valuation.

At the time of this writing (1:00 p.m. ET), all of the major indices are trading near the highs of the session (DJI + 787, SPX + 103, COMP + 339) and bond yields remain lower. Perhaps this week's mid-week sell-off was a healthy correction to help shake off some of the speculative excess that had been cropping up in the stock market. While the trajectory of inflation and yields will continue to be top of mind for investors in 2025, today's PCE report and Goolsbee commentary, and subsequent drop in yields is heling the bulls regain their footing. Next week is going to be light on the economic front, there are no earnings reports on the calendar and there are only 3.5 days of trading (¹/₂ trading day on Tuesday and markets are closed on Wednesday). Therefore, trading volume will likely be light and the potential for recent bullish momentum to persist is relatively high in my view. As a result, my forecast for next week is "slightly bullish." I'm only going with a "slightly" bullish view, rather than full bullish, because stocks are up significantly today (+1.60-1.70% across the board at the time of this writing) and we could get some modest consolidation of these gains early next week. What could challenge my outlook? The most likely culprit in my view would be higher yields.

Other Potential Market-Moving Catalysts:

Economic:

• Monday (12/23): no reports
• Tuesday (12/24): Durable Goods Orders, New Home Sales
• Wednesday (12/25): no reports
• Thursday (12/26): Continuing Claims, EIA Crude Oil Inventories, Initial Claims
• Friday (12/27): Advanced International Trade in Goods, Advanced Retail Inventories, Advanced Wholesale Inventories, EIA Natural Gas Inventories

Earnings:

• Monday (12/23): no reports
• Tuesday (12/24): no reports
• Wednesday (12/25): no reports
• Thursday (12/26): no reports
• Friday (12/27): no reports

There was a full week of economic data for markets to digest, highlighted by Wednesday's hawkish FOMC meeting. Market participants likely expected a more hawkish tone from the Fed, due to strong economic data and sticky inflation data, but the sharp sell-off in stocks suggest the Fed meaningfully surpassed those expectations. Outside of the FOMC, nearly every other economic data point conveyed economic strength. Here's the breakdown from this week's reports:

• FOMC summary: As expected, the Federal Reserve cut the benchmark rate 25 basis points (bps) to a new range of 4.25-4.50%; For 2025, the updated SEP report suggests 50 basis points of cuts less than what was communicated back in September (50 bp of cuts vs. 100 bp prior).
• PCE Prices: Headline was +0.1% month-over-month (MoM) and +2.4% year-over-year (YoY), both 0.1% below estimates. Core PCE was +0.1% MoM and +2.8% YoY, both 0.1% below estimates.
• Retail Sales: Rose 0.7% in November, up from 0.5% in October and +0.1% above estimates. However, Retail Sales ex-auto rose 0.2%, in-line with prior month but below the +0.5% expected.
• Q3 GDP – Third Estimate: +3.1%, above the +2.8% expected.
• Leading Indicators: Increased by 0.3% in November versus the -0.1% economists had expected. This represents the first positive reading since February of 2022.
• Initial Jobless Claims: 220K, down 22K from the prior week, and below the 234K expected. Continuing Claims increased to 1.874M from 1.886M last week.
• The Atlanta Fed's GDPNow "nowcast" for Q4 ticked up to 3.2% on December 18th, up from 3.1% on December 17th.

U.S. Treasury yields continued to climb higher this week, primarily driven by the Fed's more hawkish outlook, but also strong economic data. Compared to last Friday, two-year Treasury yields are up ~five basis points to 4.291% from 4.241% while 10-year yields pushed higher by over 10 basis points to the current 4.508% from 4.399%.

Expectations around future potential rate cuts from the Fed were dampened further this week because of the FOMC meeting. Currently, Bloomberg probabilities are suggesting only a 10% chance of a 25-basis-point cut at the January FOMC meeting. Additionally, the probabilities are suggesting a total of 50 basis points of cuts between now and the end of 2025 versus roughly 75 basis points of cuts last Friday.

The S&P 500 index (SPX) was taken on a roller coaster ride this week! Wednesday's FOMC hawkish surprise resulted in the largest one-day drop in the SPX since early August. The drop took the index below near-term support at the 50-day Simple Moving Average (SMA) and the technical picture was looking ominous. However, today's bullish engulfing candle (at least at the time of this writing) is helping the bulls regain technical control. We could get a re-test of the 50-day SMA next week at some point, but the technical look bullish to me provided the index remains above this indicator. Near-term technical translation: bullish

The Nasdaq 100 index (NDX) technical picture looks similar to the SPX, in that support appears to be holding firm at the 50-day SMA. However, the NDX didn't drop below it, primarily because the tech sector has been seeing the bulk of the money flow during the month of December. Though we might get a little digestion of today's 2% rally at some point, the NDX price action looks bullish to me for next week. Near-term technical translation: bullish

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). Wednesday's hawkish FOMC meeting generated a sharp across the board market sell-off and market breadth suffered as a result. Remember that the indicator I am using to measure market breadth is conveying that there were a lot of stocks that dropped below their 200-day SMA this week. On a week-over-week basis, the SPX (white line) breadth dropped to a one-year low of 55% from 68%, the CCMP (blue line) declined to a three-month low of 43% versus 49%, and the RTY (red line) sank to a four-month low of 51% from 62%.

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 (11 today): Alphabet Inc. (GOOGL - $0.48 to $188.03), Apple Inc. (AAPL - $0.83 to $248.96), Costco Wholesale Inc. (COST - $5.78 to $949.01), Decker's Outdoor Corp. (DECK + $2.53 to $207.81), Tesla Inc. (TSLA - $2.22 to $433.95), Visa Inc. (V - $0.64 to $314.24)

This Week's Notable 52-week Lows (247 today): Anheuser-Busch Inbev S.A. (BUD - $0.13 to $49.97), Chemed Inc. (CHE + $0.85 to $522.64), Haliburton Co. (HAL + $0.34 to $26.11), Mondelez International Inc. (MDLZ + $0.10 to $59.37), Nordson Corp. (NDSN + $1.11 to $210.05), Topbuild Corp. (BLD + $0.58 to $309.54)