1. The Consumer
Everyone is worried about the current health of consumers. Rising prices and interest rates are starting to wear on how much we’re willing to spend, which is why this week’s Consumer Confidence report is set to be a major catalyst for stock moves.
The report details consumers’ intentions to spend money, plan vacations, as well as their expectations from inflation and stock market prices.
Last month, the Consumer Confidence report showed an improvement in consumer outlook; it was the first positive report in four months.
The positive news cast a positive light on retail and consumer discretionary stocks as they’ve rallied more than 4% since that positive report.
Before that—from February through April—the results showed that retailers were losing confidence in the economy. Those negative reports resulted in the Consumer Discretionary ETF (XLY) losing an average of 6% in the following week.
The Consumer Confidence report comes on the same day that we’ll see earnings results from FedEx (FDX) and Carnival Cruise Lines (CCL), two companies that do a good job of reflecting consumer sentiment themselves.
Watch for any weakness in the Consumer Confidence numbers to topple the Consumer Discretionary (XLY) and Retail (XRT) exchange-traded funds (ETFs).
2. Investor's Confidence Report
It all comes down to one stock, NVIDIA (NVDA).
We just talked about the Consumer Confidence report being released on Tuesday. Well, there’s an unofficial report that captures investors' confidence these days… It’s called “NVIDIA’s Price,” and there may be a problem with it.
Things started last Tuesday. Shares of NVIDIA fell slightly while the rest of the market tried to push back to their all-time highs. The news media started asking a few questions about why NVIDIA seemed to be acting out, but there was no concern.
I mean, it’s NVIDIA, right?
Things went back to “normal” on Wednesday as NVIDIA shares ripped higher and carried the market right back to those new highs we’re hearing about every day.
But then on Thursday, something bigger happened.
NVIDIA shares took off out of the gate, hauling the market higher, only to lose its power quickly as buyers walked away from the stock and sellers took over. The stock suffered a 3.5% loss for the day, but the actual range of the price movement was almost 8%.
NVIDIA shares closed the day 8% from its all-time highs, and then something else happened… another 3% loss on Friday as selling volume intensified. Investor confidence started to show signs of fraying.
The media is really paying attention this morning as the stock is trading 2% lower in pre-market activity, and investors aren’t going to feel any better about the market if shares don’t turn things around quickly.
There are two problems here.
First, NVIDIA shares have been on a one-month, 40% rally since their earnings report last month.
It doesn’t matter what the name of the stock is, this is not natural. NVIDIA shares are now among the top 3% in terms of “overbought” or “crowded” stocks. This means that the stock needs a break. It needs to sell off to be able to run higher again at some point.
This brings us to the second problem: NVIDIA is also the most crowded trade on Wall Street.
Every analyst loves it, almost every investor owns it. Think “crowded theater” and someone yells “smoke!”
For these reasons, NVIDIA is one of the largest stories that could move the market this week.
Watch for a break below the $120 price level, which will increase fear-based selling that will spread like wildfire to the rest of the market.
3. The Fed’s Favorite Inflation Gauge
We must wait until Friday, but the Fed’s favorite inflation indicator will be released this week.
The Personal Consumption Expenditures (PCE) price index will be released before the market opens on Friday. The index measures the prices that US residents pay for goods and services and is well-known to be the Fed’s favorite gauge of inflation.
Last month’s report showed lower prices with income increasing just a bit. The report helped to spark an unlikely rally in stocks as the markets were heading into one of the worst seasonal months of the year.
Economists are expecting little change from last month’s report, but there’s something out there that could help add a surprise to the release.
Fuel prices have been on the decline for the last few months. Additionally, the food industry has been on a strong push to lower prices for entry-level menu items such as value deals and specials.
While it will take a few months for this data to make its way through the system, we may see a slightly better-than-anticipated number on Friday.
A lighter inflationary read from the PCE report on Friday would renew speculation that the Fed will be quicker to lower interest rates.
One of investors’ favorite bullish catalysts over the last six months has been the hope and speculation that the Fed will lower rates faster than the late 2024 expectations. That trade would kick in strongly with a positive PCE report on Friday.
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.