Lower Inflation Keeps Bulls in the Driver’s Seat as Earnings Begin

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Stocks keep rising as lower inflation spurs hope the Federal Reserve is almost done hiking interest rates.

The S&P 500 rose 2.4 between Friday, July 7, and Friday, July 14. The index touched its highest level since April 2022, with 82 percent of its members advancing.

Consumer prices rose 3 percent year-over-year in June. It was 0.2 percentage point less than forecast and the smallest increase since March 2021. The core reading, which focuses on stickier services like shelter, also slowed more than expected.

CME FedWatch tool showing estimated interest rates at the last meeting on December 13.

Markets reacted quickly by reducing the odds of an additional rate hike after the Fed’s July 26 meeting. (See the CME FedWatch screenshot.) The U.S. dollar also fell to its lowest level in over a year, which can support risk assets and corporate earnings.

“I think we’re close” to stopping rate hikes, policymaker Michael Barr said on Monday. Christopher Waller, another voting member at the central bank, was more hawkish and warned that another increase may be needed in September.

The University of Michigan’s consumer sentiment index also shot past expectations to its highest level since September 2021. That continued a trend of improvement that started in June after the debt ceiling was raised.

Other headlines were positive. Initial jobless claims fell more than expected. The Fed’s Beige Book survey of economic conditions also upgraded its view of business conditions as future activity turned positive.

Biggest Gainers in the S&P 500 Last Week
Match (MTCH)+14%
D.R. Horton (DHI)+13%
Domino’s Pizza (DPZ)+13%
MGM Resorts (MGM)+12%
Etsy (ETSY)+11%
Source: TradeStation Data

Weak Dollar and Housing

Assets that benefit from a weak U.S. dollar, like precious metals, fared best last week. Homebuilders also jumped as investors looked for lower rates to drive activity.

All 11 sectors rose last week, led by growth areas like semiconductors, e-commerce and electric vehicles. Airlines and cruise ships fell as traders took profits after big rallies in June.

Domino’s Pizza (DPZ) had its biggest weekly gain in over three years after announcing its food would be available on Uber Technologies’ (UBER) Uber Eats app.

Salesforce.com (CRM) jumped to a 17-month high after raising prices for its marketing software. JPMorgan Chase (JPM) and UnitedHealth (UNH) also climbed after earnings and revenue beat forecasts.

SPDR S&P 500 ETF (SPY), daily chart, with select indicators and levels.

Charting the Market

Last week’s rally landed the S&P 500 to a potential resistance level from April 21, 2022, as the Fed started hiking rates. While there are few bearish signals on the chart, some traders may look for a pause.

The relative strength index (RSI) gave one potential signal by hitting an “overbought” condition on Thursday. Another signal, based on comparing the moving averages for index members also exited a bullish condition. (It compares the number of stocks above their 20- and 50-day MAs, respectively.) The S&P 500 is additionally above the top of its Keltner Channel, a potential measure of price range.

Biggest Decliners in the S&P 500 Last Week
Progressive (PGR)-11%
Carnival (CCL)-9.5%
FMC (FMC)-8.7%
State Street (STT)-7.8%
AT&T (T)-7.1%
Source: TradeStation Data

Above the current zone, chart watchers may eye the March 2022 peak as potential resistance. They could view the August 2022 high as potential support to the downside.

The Week Ahead

Earnings season accelerates this week, with more than one-tenth of the S&P 500’s members issuing results.

Nothing important is scheduled for today.

Bank of America (BAC) and Morgan Stanley (MS) are the big names Tuesday morning. The economic data includes retail sales and NAHB’s homebuilder index.

Tesla (TSLA), Netflix (NFLX), Goldman Sachs (GS) and United Airlines (UAL) report on Wednesday. Housing starts and building permits are also due, along with crude-oil inventories.

Thursday features initial jobless claims and results from American Airlines (AAL).

American Express (AXP) and Schlumberger (SLB) report on Friday morning.


Standardized Performances for ETF mentioned above

ETF1 Year5 Years10 Years
SPDR S&P 500 ETF (SPY)+17.50%+63.40%+176.32%
As of June 30, 2023. Based on TradeStation Data.

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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