Stocks Pause as Summer Begins and Central Banks Talk Tough on Inflation

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Stocks began the summer with a pause as central bankers around the world vowed to crush inflation.

The S&P 500 fell 1.4 percent in the holiday-shortened week between Friday, June 16, and Friday, June 23. It was the first drop after five positive weeks in a row. More than 80 percent of the index’s members and all 11 sectors closed in the red, according to TradeStation data.

“We’re very far from our inflation target,” Federal Reserve Chairman Jerome Powell told Congress on Wednesday. He added policymakers could increase interest rates by another 50 basis points, consistent with the central bank’s last set of projections.

Powell wasn’t alone. The Bank of England tightened by 25 basis points more than expected. Norway and Switzerland both hiked and suggested that further moves could be coming. Turkey’s central bank raised by a whopping 650 basis points. Those moves follow a similar meeting by the European Central Bank the week before.

Housing was the other big story last week. NAHB’s homebuilder sentiment rose more than expected and returned to positive territory for the first time in almost a year. Housing starts had their biggest increase in three decades and building permits surprised to the upside. Existing home sales also exceeded forecasts.

Biggest Gainers in the S&P 500 Last Week
CarMax (KMX)+8.3%
Generac (GNRC)+8.1%
Dollar Tree (DLTR)+5.5%
Merck (MRK)+4.8%
TransDigm (TDG)+4.2%
Source: TradeStation Data

Banks Tumble

Banks were some of the biggest decliners last week as the hawkish comments pushed the yield curve to its most inverted levels since March. That situation, with long-term interest rates almost a full percentage point below shorter-term rates, can hurt lender profitability.

The Fed’s stance also weighed on global stocks, precious metals and energy.

Health care was the best performing major sector, dropping less than 0.2 percent. Homebuilders inched higher.

CarMax (KMX) had the biggest gain in the S&P 500 last week after earnings and revenue beat estimates. Intel (INTC) dropped after failing to provide bullish updates about its foundry business. Solar-energy stocks also remain under pressure amid worries about long-term profitability.

S&P 500, daily chart, with select patterns and indicators.

Charting the Market

The S&P 500 is still in the midst of its fourth straight positive month and its third straight winning quarter. Bullish traders may expect the recent positive momentum to continue. However some chart watchers may expect a pause.

One reason could be Keltner Channels, an indicator that estimates potential ranges based on recent history. The S&P 500 crossed above the top of its channel on June 1, but slipped back inside of them last week. Similar moves in late April, early February and last August were followed by deeper pullbacks toward the bottom of the channel.

Second, the Relative Strength Index (RSI) recently hit an “overbought” condition for the first time since last summer.

To the upside, traders may target the April 2022 weekly high of 4513. To the downside, they may look for support around 4300, a consolidation zone from early June.

The Week Ahead

This week’s calendar has several economic reports and a few noteworthy earnings. The biggest events could be a Powell speech on Wednesday morning and inflation data on Friday.

Biggest Decliners in the S&P 500 Last Week
Enphase Energy (ENPH)-13%
SolarEdge Technologies (SEDG)-12%
Intel (INTC)-9.3%
Advanced Micro Devices (AMD)-8.4%
Moderna (MRNA)-8%
Source: TradeStation Data

Carnival (CCL) announces quarterly results in the premarket today.

Walgreen Boots Alliance (WBA) follows tomorrow morning. Durable-goods orders, consumer confidence and new home sales are also due on Tuesday.

Powell speaks at 9:30 a.m. ET on Wednesday. General Mills (GIS) reports earnings and crude oil inventories will be released.

Initial jobless claims and the final reading of first-quarter gross domestic product are on Thursday. Nike (NKE) issues numbers after the closing bell.

Friday brings the personal consumption expenditures (PCE) deflator for May — a potentially important measure of inflation.

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