Weekly Trader's Outlook

If you read last week's blog, you might recall that Nate had a "Cautious" outlook for stocks this week, noting a number of key factors: 1) sideways consolidative patterns in the indices;  2) bearish September seasonality; 3) continued uncertainty around Iran/oil prices/yields; and 4) the return of fund managers/traders to the desk with higher volume/adjustments.

While the major indexes were relatively calm throughout most of the week, there was no shortage of movement beneath the surface and across markets. Market participants continued to closely monitor economic data for clues on inflation trends and whether economic activity can continue to support equity valuations. Energy prices remained a focal point, as the move higher in oil cascaded to higher bond yields with increasing volatility.

Another notable theme this week was sector rotation. Leadership continued to fluctuate as prior leaders, specifically Financials and Healthcare, began to weaken while Energy moved toward the top of the leaderboard amid strength in oil markets. Despite some hotter-than-expected inflation data and seasonal weakness, there has been a lack of strength in more traditionally defensive groups, such as Staples and Utilities, which are also sitting at relative lows vs the S&P 500. Prices tended to consolidate in more cyclical sectors, such as Tech, Communication Services, and Discretionary.

On the earnings front, second quarter earnings have largely come to a close, shifting investor attention away from backward-facing results and more towards the outlook for economic growth, inflation, and monetary policy. Perhaps most importantly, investors most likely spent much of the week positioning ahead of next week's Federal Open Market Committee (FOMC) meeting. According to CME FedWatch data as of September 11, interest-rate futures markets imply roughly a 90% probability of a rate hike at next week's FOMC meeting. Following 6-month lows in the VIX, the CBOE Market Volatility Index broke decisively above its 50-day moving average (DMA) towards just below 18, which implies a roughly 1.13% daily move in the S&P 500.

At the time of this writing (Friday morning) stocks are higher across the board, after testing potential support levels yesterday. Looking at the price action, stocks may be reacting to lower oil prices (WTI falling below $100/barrel at key resistance). Ten-year Treasury yields continued moving higher following the CPI data, but investors may have discounted the expected hike in equities already based on today's positive reaction. Recently, crude oil prices and Treasury yields have remained positively correlated, while both have generally moved inversely to U.S. equities.

I am going to keep a "Cautious" outlook for next week for a few reasons: 1) Elevated oil prices and Treasury yields; 2) Historical seasonal headwinds associated with September; 3) Next week's FOMC meeting and accompanying policy guidance; and 4) An increase in volatility as equities test key technical support levels.

What could challenge my forecast? 1) Lower oil prices/yields; 2) Buyers successfully defending the S&P 500's 50-day simple moving average, which may serve as an important area of intermediate-term support; and 3) Improvement in market breadth measures, particularly participation beneath the surface of the major indexes.

• Monday (9/14): no reports
• Tuesday (9/15): no reports
• Wednesday (9/16): Advance Retail Sales, FOMC Interest Rate Decision, FOMC Economic Projections (SEP), Federal Reserve Press Conference
• Thursday (9/17): Building Permits, Housing Starts, Initial Claims, Continuing Claims
• Friday (9/18): no reports

• Monday (9/14): Dave & Buster's Entertainment Inc. (PLAY)
• Tuesday (9/15): Trip.com Group Ltd. (TCOM), Vera Bradley Inc. (VRA)
• Wednesday (9/16): General Mills Inc. (GIS), Lennar Corp. (LEN), Cracker Barrel Old Country Store Inc. (CBRL)
• Thursday (9/17): Darden Restaurants Inc. (DRI), Scholastic Corp. (SCHL)
• Friday (9/18): no notable announcements

Economic data this week painted a somewhat mixed picture of the US economy. Labor market data continued to suggest employment conditions remain fairly healthy. However, several key indicators pointed to a slowing economy. Investors remained focused on inflation and monetary policy expectations ahead of next week's FOMC meeting, with Treasury yields moving quickly higher throughout the week.

• Consumer Credit: $18.062 billion vs $11.34 billion est.
• NFIB Small Business Optimism: 98.7 vs 99.3 est.
• NY Fed 1-Yr Inflation Expectations: 3.58% vs 3.60% est.
• MBA Mortgage Applications: -2.7% vs a prior 0.8%.
• ADP Employment Change: The week of August 15th was 10k vs. a prior 11.75k. The week of August 22nd was 12k vs. a prior 10k.
• Initial Jobless Claims: Fell right in line from prior at 206k.
• Producer Price Index (PPI): Final demand month-over-month was 0.4% vs 0% prior. Final demand year-over-year was 5.4% vs 4.7% prior.
• Wholesale Inventories: 1.3% vs 1.3% prior.
• Existing Home Sales: 3.98 million vs prior 4.06 million. Month-over-month was -2.0% versus -1.7% previously.
• Consumer Price Index (CPI): CPI rose 0.4% month over month, meeting expectations. Core CPI rose 0.2%, modestly beating expectations of 0.3%. CPI YoY rose 3.4% while Core CPI rose 2.4%, both meeting expectations.

Treasury yields moved modestly higher during the week as investors continued to evaluate economic data and position themselves ahead of next week's FOMC meeting. Rising energy and commodity prices and ongoing inflation concerns appeared to contribute to upward pressure on rates across much of the yield curve.

The Federal Reserve remained a central theme for markets this week as investors look ahead to the September policy meeting. While labor market conditions have generally remained resilient and economic activity has continued to expand, market participants are awaiting additional inflation data and updated economic projections before drawing firmer conclusions regarding the path of monetary policy into year-end.

The S&P 500 has been in a tight triangle corrective wave for the last month following a multi-month bearish divergence in momentum. This momentum reset phase has fallen in accordance with seasonal trends. As price has become increasingly compressed over the last few weeks, volatility has followed suit, with the Bollinger Bands reaching the tightest levels seen all year. Volatility tends to be mean-reverting and typically accompanies decisive price breakouts.

At the time of this writing on Friday morning, the index has broken through critical support at 7600 on a volatility expansion. This old support, now new resistance, sits at wave E of its final triangle corrective wave, according to Elliot Wave Theory. Under Elliott Wave Theory, this phase of a triangle consolidation has historically been associated with rebounds that continue the prevailing longer-term trend after a test of support, although outcomes can vary. However, past performance is no guarantee of future results and the FOMC meeting next week can create additional volatility for the index.

This breakdown was followed by a pause at the 50-day moving average (DMA) just below. The 50-day moving average appears to have been met with increased buying activity as bulls attempt to defend this intermediate-term trend gauge. Despite the weakness in price, momentum has remained in a bullish regime above the 0 line in the MACD, which is supportive of a bullish regime that is still intact.

Looking at the slope of the 50 DMA, it's suggestive of a continuing uptrend. Now if the slope of that line as a measure of trend begins to bend, that is where the tone in the market may shift to more defensive in nature. There have been times, such as in late June and early July, where we saw the index dip below the 50 DMA for a few sessions before quickly resuming its uptrend. The technical evidence may suggest conditions that resemble prior instances in which the index briefly moved below the 50 DMA before resuming its uptrend. To challenge that view, if the index strikes two consecutive weekly closes beyond this measure of support, prices could find a deeper retracement to summertime lows near 7300.

Near-term technical translation: neutral

The Nasdaq 100 index ($NDX) is on track for modest weekly gains, though I would characterize this week's price action as a healthy period of consolidation above the 50-day SMA following a strong bounce off the July 29th lows. The lows on that day essentially coincided with the implosion of Situational Awareness and strong earnings reports from AMZN & MSFT. There were several fundamental data points around the AI secular growth story that are likely supportive of tech – Nvidia's Jensen Huang partnering with six major Wall Street asset managers to establish a $500B financing platform for AI infrastructure; AI server maker Super Micro issuing strong guidance (revenue 25% above analysts estimates) and SanDisk forecasting strong growth out until 2030 at yesterday's Analyst Day. As for the NDX, the prior all time high (30,762) appears to be the next level of resistance to transcend, but otherwise the technicals are bullish.

Near-term technical translation: moderately bullish

The Russell 2000 appears to have gapped below a confluence of critical support at the neckline of its possible double top formation and the 100 DMA (at the time of this writing on Friday). This small-cap index typically has an inverse correlation with crude oil/yields, as smaller companies tend to carry larger amounts of debt, making them increasingly sensitive to rising interest rates. This price action is following a multi-month bearish divergence in momentum with the MACD. Last week, this indicator shifted into a bearish regime below the 0 line. This confirms the break in longer-term price structure.

From a longer-term perspective, two weekly closes beyond this level could provide additional evidence that the long-term trend in small caps has shifted. If this occurs and the technicals continue to shift back in favor of the bears for this index, longer-term support sits at the confluence of January highs and the 200 DMA ~2750.

If equities begin to sniff out any short-term weakness in crude oil/yields, we could see a reversal back above the 100 DMA, which some technicians would classify as a "bear trap," with a continuation toward range highs near 3050.

Near-term technical translation: bearish

Jim Ferraioli , Director of Digital Currencies Research and Strategy, authored this report.

The Bitwise 10 Large Crypto Index is flat since last Friday, with bitcoin down 1% and ether up 6% at the time of writing. Another week has gone by, and another crypto exploit has come to fruition. Earlier in the week, hackers claiming to be "white hat" hackers exploited Liquid, a layer-2 Bitcoin blockchain, successfully extracting 4,000 bitcoin.

The incident was associated with Liquid's peg mechanism, but reported analyses indicate it stemmed from a software validation flaw that enabled unbacked L-BTC to be redeemed through the legitimate bridge process, rather than a compromise of federation signing keys or the bridge itself. While 3,600 of the stolen bitcoin were returned, 400 bitcoin, approximately $30 million, is being kept as a "white hat bounty." While it appears the parties involved are continuing to attempt to reach an agreement regarding the remaining 400 bitcoin, this reinforces that the biggest security issues in crypto continue to occur on the edge. While the core blockchains remain secure, moving funds on and across chains remains a point of contention. This technically was not a bridge exploit, but it may still help reinforce existing risk concerns regarding bridges and sidechains.

While bitcoin largely remains within the bounds of the range it has traded in since February, Zcash has continued to rally. While almost identical to bitcoin from a monetary perspective, crypto investors have made the case that privacy coins are seeing renewed interest in what has been a relatively old concept. Monero was launched in 2014 and Zcash launched in 2016. Monero has closely tracked bitcoin's growth over time. By applying a lag of 1,500 days to account for different launch dates, these two tokens tell a similar story.

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, % 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 (109 today): Airbnb Inc. (ABNB + $0.51 to $185.64), Bank of America Corp. (BAC + $0.20 to $64.29), Cardinal Health Inc. (CAH + $0.44 to $231.68), Eaton Corp. (ETN + $2.34 to $455.67), JPMorgan Chase & Co. (JPM + $1.86 to $364.97), Palo Alto Networks Inc. (PANW - $9.50 to $386.50)

This Week's Notable 52-week Lows (55 today): AppLovin Corp. (APP + $8.12 to $320.79), ON Holding AG (ONON + $0.43 to $32.02), Post Holdings Inc. (POST - $0.71 to $79.83), Pilgrim's Pride Inc. (PPC + $0.05 to $27.65), Universal Corp. (UVV - $0.09 to $44.80), Wingstop Inc. (WING + $6.44 to $120.34)