Breakout or Breakdown? Investors Brace for Inflation After Scary Comments on the Economy

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Negative headlines battered stocks last week. Traders will now watch to see if they can continue to bounce or fail at potentially key resistance.

The S&P 500 fell 1.2 percent in the holiday-shortened week between Friday, May 27, and Friday, June 3. The dip followed the biggest weekly rally in 1-1/2 years, with all the major indexes edging lower.

Sentiment took a hit on Thursday, when a stronger U.S. dollar prompted Microsoft (MSFT) to lower revenue guidance. The next day, closely watched Apple (AAPL) analyst Katy Huberty predicted slower App Store growth. Micron Technology (MU) also received a downgrade from Piper Sandler that cast doubt on the health of the PC market.

That was the company-level news. Worries about inflation and higher interest rates also continued.

“That hurricane is right out there down the road coming our way,” JPMorgan Chase (JPM) CEO Jamie Dimon said of higher prices. “You better brace yourself.” He added that the severity of the squeeze isn’t yet clear.

Two current voting members of the Federal Reserve were also hawkish.

We “will need to be resolute and intentional in removing policy accommodation to tighten financial conditions,” Cleveland Fed President Loretta Mester said in a speech Thursday. “Financial markets could remain very volatile […] this will be painful but so is high inflation.”

Vice Chair Lael Brainard added in a CNBC interview that “we’ve still got a lot of work to do” raising interest rates.

Energy Leads Again

Most sectors declined last week. Healthcare and biotechnology stocks fell the most. Real estate, airlines and retailers also struggled.

Energy rose more than 1 percent as companies like EOG Resources (EOG) and Hess (HES) reached new 52-week highs. The group remains this year’s top performer as crude-oil inventories narrow to their tightest level since October 2008. At that time, demand was collapsing on the brink of a recession. This time, demand is growing as the economy continues to rebound from the pandemic.

Chinese stocks also gained for a fourth straight week. The country’s market has been trying to stabilize as officials in Beijing support investors with interest-rate cuts and looser coronavirus restrictions. Solar energy was the other big gainer last week, according to TradeStation data.

Biggest Gainers in the S&P 500 Last Week
Salesforce.com (CRM)+12%
Under Armour (UA)+7.5%
SolarEdge (SEDG)+6.4%
Ralph Lauren (RL)+6.4%
Amazon.com (AMZN)+6.3%
Source: TradeStation Data

Salesforce Jumps

Headlines also impacted software company Salesforce.com (CRM) and Tesla (TSLA).

CRM had its biggest weekly gain since November 2020 after earnings, revenue and guidance beat forecasts. The Dow Jones Industrial Average member had lost about half its value between November and mid-May as investors unloaded high-multiple growth names. Other cloud-software companies like UiPath (PATH), Datadog (DDOG) and Okta (OKTA) also gained following strong results. (DDOG reported earlier in May.)

TSLA fell after Reuters reported the CEO Elon Musk wanted to cut salaried staff by 10 percent because of a “super bad feeling” about the economy. On Saturday, he downplayed the story, which was based on a leaked memo.

S&P 500, daily chart, with key technical indicators.

Charting the Market

The S&P 500 ended last week around the lows of February and March. Such levels can become resistance, which raises an important question: Will stocks roll over and make a lower high, or will they break out and continue to rebound?

Short-term momentum may favor the bulls with the eight-day exponential moving average (EMA) above the 21-day EMA.

Buyers may gain confidence if prices remain above these averages. A break under last week’s range could also bring sellers to the market.

Bond yields may be another key chart after breaking a three-week losing streak. The 10-year Treasury yield is about 30 basis points below its October 2018 high. It could remain active with inflation data this Friday and the next Fed meeting on June 15.

Economic news remained mostly positive last week. Non-farm payrolls grew more than forecast as workers returned to construction, transportation and hospitality jobs. Unemployment was unchanged and wage gains slowed. The Institute for Supply Management’s manufacturing index beat estimates as bottlenecks eased and production grew. Those items are potentially good news on the inflation front.

Consumer confidence for May declined less than feared and was revised upward for April. Initial jobless claims unexpectedly declined, another sign of strength in the labor market.

The Week Ahead

Aside from the inflation report, this week is relatively quiet.

Apple’s (AAPL) developer conference starts at 1 p.m. ET today. It’s expected to bring incremental software updates but no major hardware news.

No major events are scheduled for tomorrow. Crude-oil inventories are due Wednesday and Campbell (CPB) reports earnings.

Biggest Decliners in the S&P 500 Last Week
American Airlines (AAL)-11%
Bath & Body Works (BBWI)-10%
Illumina (ILMN)-9.7%
Paramount Global (PARA)-9.2%
Regeneron Pharmaceuticals (REGN)-9%
Source: TradeStation Data

Thursday features initial jobless claims and earnings from Nio (NIO). Chipmaker Advanced Micro Devices (AMD), the most actively traded symbol on TradeStation, also holds an analyst day. CoinDesk’s Consensus Conference begins as well, potentially impacting cryptocurrencies.

The consumer price index (CPI) is scheduled for release at 8:30 a.m. on Friday morning, followed 90 minutes later by consumer sentiment.


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