The Fuse
Equity futures are getting drilled this morning following the very hot CPI numbers from January.
As I mentioned yesterday, the February gains through mid-month were very strong, more than 3.7% and at that pace we could really not expect to see a 7.4% gain for the month. Stocks are likely to give back a bit more ground here (see support levels).
Interest Rates are rising sharply this morning as bonds are getting whacked hard. Yields across the board are rising up as Fed futures are starting to remove expectations for more rate cuts than the Fed was predicting in 2024.
/Stocks are struggling to hold recent gains, it’s like taking the elevator up and the window out. European stocks were down over night modestly, Asian markets were closed for the Lunar New Year holiday. Tech stocks are down hard so far as are small caps, which get hammered when interest rates jump. Inflation was hot this morning, and further we have seen equities exploding higher this month
Earnings last night were poor from ANET and CDNS, but this am strong numbers from Coke and solid guidance and a good quarter with guidance from Shopify. But tech is showing weaker guidance overall, that was seen this am from Datadog, which is falling on a weak forecast. Some big earnings later in the week to pay close attention to the action and the response to forecasts.
A mixed session with the Dow Industrials and Russell 2K. After a very strong start to the month the widely-held indices may be ready to take a breather. We are now in phase 2 of earnings season, some big names but mostly secondary ones. We will also hear plenty from energy and homebuilders in the coming weeks. A holiday is upon us next week and with the rise in volatility and CPI out today there could be some fireworks yet to come.
Very strong breadth day with the Russell 2K carrying the load. As we have said repeatedly when this index reflects a heavy tilt towards bullishness it tends to lead. However, the big cap names were sold off early this morning and never recovered, the VIX rising up strong. Certainly buyers of protection were out in force, but another good breadth day would signal followthrough and possibly more upside.
A worrisome sign when volume is lower as the markets rise. However, the lower turnover in the Nasdaq and SPX 500 mean they were not distribution days, they were simply moderate sell days. That means there is a chance now for markets to correct upwards, but the clock is running fast with the month nearly half over. We still see a strong month of February but eventually there will be a weaker month, perhaps it will be March.
With another close above 5K there is good support at that level. Though the SPX 500 was lower on the day the moving averages are catching up, and that means rising support lines. We should note the very strong performance so far in February is probably unsustainable. Last week’s lows at 4,850 on the SPX is is logical place to test price levels.
The Internals
What’s it mean?
It certainly seems like everything was pointed upward today, save for the TRIN and put/call ratio. The VIX climbed as buyers of cheap puts were swarming. But there was strong support for small caps, as the VOLD and ADD were strong all session. These breadth figures point towards higher prices during the session, though volume was a bit anemic in some respects. Ticks were green and pointing higher most of the day.
The Dynamite
Economic Data:
- Tuesday: Small Biz Optimism, CPI for January
- Wednesday: Crude Oil Inventories
- Thursday: Jobless claims, retail sales, IP and cap utilization, import/export prices
- Friday: PPI for January, housing starts/permits, Michigan sentiment preliminary
Earnings this week:
- Tuesday: KO, ABNB, MAR, MGM, WELL
- Wednesday: CEVA, GPN, KHC, MLM, CF, CSCO, FSLY, EQIX, VECO
- Thursday: ARCH, DE, HBI, IDCC, SHAK, WEN, AMN, AMAT, DLR, IR, ROKU, SKT, TTD
- Friday: AXL, THS, VMC
Fed Watch:
We heard from several Fed speakers this past week, most notable of them was Rafael Bostic from Atlanta, a voting member who seems to believe inflation is on the right track heading downward. Further, Lorie Logan from Dallas Fed believes the committee needs to see more data before entering a rate cut mode. Clearly the members (others too) are being a bit more conservative, not a bad idea at this juncture and with the markets being more aggressive about rate cuts.
Stocks to Watch
VIX – Once again, we have a three day weekend coming up and we often (not always) see a big drop in volatility before then. This week’s action may be softer to start the week but the markets are not all that overbought either, so a bit of rallying might occur as well.
Inflation – We have the January readings of CPI and PPI this week along with retail sales. The Cleveland Fed Nowcasting is calling for a 1.5% annualized gain on the top line but core still a bit hot at 3.9%. If the numbers come down we could see a sharp market rally.
Small Caps – The Russell 2K has been the laggard so far this year, but had a nice jump towards the end of the week. If this was simply short covering then the IWM will go back down, especially if rates are on the rise.