Unlike last week, we’re kicking off what could be one of the most important weeks of the year today.
From an economic standpoint, we’re getting a look at the latest consumer price index (CPI) and producer price index (PPI) data.
These are the market’s favorite inflation gauges. Remember, the Fed’s favorite is the personal consumption expenditures (PCE), which was released on March 29. The data showed that inflation may be set up to make a comeback. That report, along with some of the “Fed Speak” last week has bond traders changing their tune.
I’ll talk about that in just a second.
Anyhow, CPI and PPI data will hit the wires on Wednesday and Thursday respectively. In addition, the notes from the most recent FOMC meeting will be released on Wednesday at 2 P.M.
Here’s the rub.
A hotter-than-expected CPI report on Wednesday combined with a set of minutes from the FOMC meeting that suggests the Fed may lower the number of rate cuts in 2024 would move this market lower by a few percent.
Remember, the stock market “took an advance” on lower rates to rally stocks higher. Any sign that the Fed may not carry through with those rate cuts will cause an immediate rip lower in stocks.
Guess what, the bond market is already placing its bets on what the Fed is going to do. You need to listen to them. I’ll decipher their actions in a minute.
Earnings Season is Here
Let’s talk about the other 903-billion-pound gorilla in the room this week: Earnings season.
This week officially kicks off the first quarter earnings season with Citibank (C), JPMorgan (JPM), and Wells Fargo (WFC) reporting their quarterly results on Friday.
The market cap of these three banks alone comes to $903 billion, and there’s a lot more than that hitting the earnings parade next week.
Stocks remain perched at their highs as we head into the season. Ask anyone that tracks investor sentiment how they feel about a market trading at highs on the first day of earnings season… go ahead, ask them.
We hate it.
It’s one sign that the market is priced for perfection.
Historically, banks set the tone for the season. Right now, the financial ETF (XLF) is trading near its highs with the potential for a breakout on good news later this week.
That scenario should put us back in rally mode after a few weeks of the market trying to consolidate.
Let me take a moment to paint the picture I would prefer.
Let’s see the banks drop some downgraded outlooks on the market over the next week. Think about it… that’s not a far-fetched idea, given the fact that the Fed’s interest rate outlook may be in flux.
That move would cause some short-term pain as we could see the S&P 500 losing 5-10% quickly. But it would also set things up for a perfectly timed “buy the dip” rally ahead of the more important earnings season that kicks off in two weeks.
That’s the earnings season that contains names like Microsoft (MSFT), Nvidia (NVDA), Meta (META), Amazon (AMZN), and other leaders of the market.
In a perfect world, a quick dip and rip rally ahead of the slate of technology companies would set the market up to finish April on a strong note with enough momentum to carry it through much of May.
What is Our Favorite Indicator Saying?
Things haven’t improved from the perspective of market breadth.
The percentage of S&P 500 companies trading above their 50-day moving averages has been on the decline. That drop tells us that the technicals of the market are starting to show signs of tiring.
This type of activity usually happens ahead of a short-term correction in stocks.
This is the one indicator that I’ll watch closely this week as market momentum means everything when you’re sitting at all-time highs.
Bottom Line
The market still demands a cautious eye and the benefit of the doubt this week as we’re still at a tipping point.
Any “heat” in the CPI and PPI reports will cause investors to start taking profits aggressively.
I’m watching the Russell 2000 Index’s ETF (IWM) more closely than the other indices as this represents the “risk-on” trade.
A break below $200 suggests that this market is set to drop 5-10%.
A break above $210 will allow the market to remain at its highs, but I doubt that we’ll see much progression above that for now without that “healthy correction” I keep mentioning.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.