Stocks Cling to Support as Inflation Rages and Interest Rates Surge

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Stocks are trying to hold a support level as investors worry about inflation and soaring interest rates.

The S&P 500 slid 0.2 percent between Friday, April 29, and Friday May 6. The index swung wildly despite the small closing change. It initially plunged within a few points of the May 2021 low, then quickly rebounded to less than a point below the previous week’s high. The Nasdaq-100 continued to lag with a drop of 1.3 percent.

“Inflation is much too high … and we’re moving expeditiously to bring it back down,” Federal Reserve Chairman Jerome Powell said after raising interest rates by 50 basis points on Wednesday. It was the biggest rate hike in 22 years. The central bank also plans to start trimming its balance sheet in June, which is intended to have a similar tightening effect. Despite the hawkish steps, Powell ruled out a more aggressive 75 basis point hike as “not something the committee is actively considering.”

Biggest Gainers in the S&P 500 Last Week
EPAM Systems (EPAM)+31%
Albemarle (ALB)+26%
Devon Energy (DVN)+20%
Occidental Petroleum (OXY)+18%
Pioneer Natural Resources (PXD)+16%
Source: TradeStation Data

Worker shortages remain a key issue for an economy struggling to recover from the lockdowns of 2020. The Institute for Supply Management said a lack of staff depressed manufacturing and services in April. A separate report from the Labor Department noted that 11.5 million jobs were unfilled in March as 4.5 million workers resigned. Those numbers — both records — are equivalent to the populations of Belgium and Houston, respectively. ADP’s monthly survey of private-sector payrolls also missed estimates because of labor shortages.

Energy Surges

Energy remained the market’s top-performing sector by a wide margin. The group jumped 10 percent last week, its biggest gain since the beginning of January. Banks, homebuilders, semiconductors and utilities also advanced.

Chinese stocks, biotechnology and software makers were some of the biggest decliners.

EPAM Systems (EPAM) jumped after reporting strong quarterly results. The technology company, only added to the S&P 500 in December, plunged early in the year because of its exposure to Eastern Europe. Albemarle (ALB) also beat estimates and raised guidance as Lithium prices surged.

Under Armour (UAA) led the index’s decliners as supply-chain issues hit results.

S&P 500, weekly chart, showing potential technical patterns.

Charting the Markets

The S&P 500 has dropped for five straight weeks, its longest losing streak in almost 11 years. That could make some investors wonder if the current decline is nearing an end.

Big swings may have produced an “inverted hammer” candle” on the weekly chart. That’s a potential reversal pattern, especially because it followed a test of the 4061 area where the index bounced almost exactly a year ago.

The 10-year Treasury chart could also be in focus as yields near their 2018 peak around 3.25 percent. (They’ve more than doubled this year.) A halt around this level could potentially calm fears about high-multiple growth stocks and the Nasdaq-100.

Sentiment remains unusually bearish. Fewer than one in five investors polled by the American Association of Individual Investors think the stock market will rise in the next six months, while more than half expect a decline. (The “bullish” reading remains near a 30-year low, while the “bearish” camp recently hit a 13-year high.) Some analysts view these surveys as contrary indicators showing how investors have already positioned, creating the potential for a swing in the opposite direction.

Inflation Reports This Week

This week brings more quarterly results and economic data. Investors may pay extra attention to inflation reports on Wednesday and Thursday.

Palantir (PLTR) and Upstart (UPST) report earnings today. Crude-oil traders could also focus on potential reaction to Russia’s Victory Day parades.

Tomorrow brings numbers from Occidental Petroleum (OXY) and Roblox (RBLX).

Biggest Decliners in the S&P 500 Last Week
Under Armour (UA)-31%
Expedia (EXPE)-24%
DISH Network (DISH)-22%
Illumina (ILMN)-16%
Rockwell Automation (ROK)-15%
Source: TradeStation Data

Wednesday’s consumer-price index (CPI) could be a big number because inflation is running at a 40-year high. Signs of improvement could potentially lift sentiment. Crude-oil inventories are due later in the morning and Walt Disney (DIS) reports after the closing bell.

Producer prices, a measure of wholesale inflation, and jobless claims follow on Thursday morning.

Consumer sentiment is the last data point of the week on Friday morning.

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