Can Stocks Keep Running With Another Big Inflation Report This Week?


Stocks fell last week as traders sold recent gainers in the technology space. They now face a potentially big test with key inflation data due tomorrow morning.

The S&P 500 retreated 1.1 percent between Friday, February 3, and Friday, February 10. It was the first decline in the last three weeks. The technology-heavy Nasdaq-100 had its first negative week of the year, sliding 2.1 percent as Alphabet (GOOGL) and Meta Platforms (META) ran into a wall of sellers.

Instead of a single event causing the drop, it seemed to result from buyers pausing after January’s big gains. Recent hopes of lower inflation could now be priced in, forcing investors to wait six weeks before knowing the Federal Reserve’s reaction. Will central bankers stop their rate hikes, or remain hawkish because unemployment is so low?

Tuesday’s consumer price index could be important because the same report helped lift stocks in each of the last four months. Geopolitics could be another issue this week as Russia increases attacks in Ukraine and Washington reacts to suspected Chinese surveillance devices.

Growth Stocks Fall

Late 2022 and early 2023 saw rebounds in companies that would benefit from lower interest rates and a weaker dollar. Just the opposite happened last week as investors dumped large growth companies like GOOGL, META, (AMZN) and Netflix (NFLX).

Biggest Gainers in the S&P 500 Last Week
Catalent (CTLT)+26%
Fortinet (FTNT)+12%
Everest RE (RE)+11%
Cincinnati Financial (CINF)+8.7%
DexComm (DXCM)+8.7%
Source: TradeStation Data

Biotechnology, Chinese technology stocks and airlines also skidded lower.

Energy was the only positive sector after Russia cut oil production by 500,000 barrels.

Treasury yields also rose after a poor auction for 30-year securities. That combination of higher oil prices and higher yields potentially resembles some of the bear-market conditions that hurt sentiment in 2022.

Charting the Market

While some technical patterns have improved for the S&P 500 this year, there could be signs of the bulls pausing.

First, last week was the first week of the year that didn’t make a new high above the previous week.

Second, proprietary TradeStation indexes show fewer index members above their 20-day moving averages than their 50-day MAs. That internal market condition preceded bearish reversals in late August and early December. (See the chart below.)

SPDR S&P 500 ETF (SPY), daily chart. Blue line shows the number of index members above their 20-day moving averages and red line shows the number above their 50-day MAs. Lower study is MACD. White arrows show bearish crossovers.

Third, the moving average convergence/divergence (MACD) oscillator has turned negative.

Fourth, contrary indicators like Cboe’s volatility index (VIX), the U.S. dollar index and the 10-year Treasury yield, had their highest weekly closes since early in the year.

The Week Ahead

Today’s main items are earnings reports after the closing bell. Palantir Technologies (PLTR), Arista Networks (ANET). SolarEdge Technologies (SEDG) and Avis Budget (CAR) are some of the big names.

Biggest Decliners in the S&P 500 Last Week
Lumen Technologies (LUMN)-25%
International Flavors & Fragrances (IFF)-16%
VF (VFC)-14%
Baxter International (BAX)-12%
Paramount (PARA)-12%
Source: TradeStation Data

As mentioned above, tomorrow’s inflation report is the first major item this week. It’s due at 8:30 a.m. ET, one hour before the market opens. Marriott (MAR), Coca-Cola (KO) and Airbnb (ABNB) issue results as well.

Wednesday features retail sales, which could impact sentiment. NAHB’s housing-market index and crude-oil inventories come out during the session. Cisco Systems (CSCO), Shopify (SHOP) and American International Group (AIG) release quarterly numbers.

Initial jobless claims, housing starts and building permits follow on Thursday morning. Applied Materials (AMAT) reports in the postmarket.

Deere (DE) earnings are the main item Friday morning.

Standardized Performances for ETFs mentioned above

ETF1 Year5 Years10 Years
SPDR S&P 500 ETF (SPY)-9.65%+44.19%+171.53%

As of Jan. 31, 2023. Based on TradeStation Data.

Performance data shown reflects past performance and is no guarantee of future performance. The information provided is not meant to predict or project the performance of a specific investment or investment strategy and current performance may be lower or higher than the performance data shown. Accordingly, this information should not be relied upon when making an investment decision.

Exchange Traded Funds (“ETFs”) are subject to management fees and other expenses. Before making investment decisions, investors should carefully read information found in the prospectus or summary prospectus, if available, including investment objectives, risks, charges, and expenses. Click here to find the prospectus.

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