Stocks Try to Bounce as Yields Fall But Global Risks Increase

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Stocks are trying to bounce as investors weigh potential positives against rising global risks.

The S&P 500 rose 0.4 percent between Friday, October 6, and Friday, October 13. It was the index’s second straight positive week as the fourth quarter gets underway. Ten-year Treasury note yields also dropped for the first time in six weeks.

Stocks climbed amid signs the Federal Reserve is done hiking rates. Philadelphia Fed President Patrick Harker and board governor Christopher Waller suggested September’s rapid increase in Treasury yields may reduce the need for further tightening. Crude-oil inventories unexpectedly rose the most in eight months, which could help stem inflation. The first batch of bank earnings were also better than feared.

But escalating violence in the Middle East threatened to undermine those positives. Investors worried about a potential Israeli ground attack on Gaza or disrupted oil supplies. They’re also nervously watching the deadlock in the House of Representatives, which must chose a new speaker to avoid a government shutdown next month.

Last week’s economic news had little impact on the market. Inflation was slightly higher than expected, mostly because of oil prices.

Biggest Gainers in the S&P 500 Last Week
Northrup Grumman (NOC)+16%
Marathon Oil (MRO)+14%
Huntington Ingalls Industries (HII)+11%
EOG Resources (EOG)+11%
Devon Energy (DVN)+11%
Source: TradeStation Data

Energy, Gold Rally

Energy producers and gold miners jumped last week because of the crisis in the Middle East. Military suppliers including Northrup Grumman (NOC) and Lockheed Martin (LMT) also surged.

The other top-performing sectors were utilities and real-estate investment trusts, which had fallen recently because of higher interest rates.

Wells Fargo (WFC) led the banks higher after results beat estimates. Its provisions for bad loans were also smaller than feared. JPMorgan Chase (JPM) and Citi (C) had similar results.

Health insurers gained after UnitedHealth (UNH) beat consensus and raised its full-year forecast.

DaVita fell the most in the S&P 500 last week after Novo Nordisk (NVO) announced positive data for its Ozempic diabetes drug. Companies associated with dialysis and diabetes care, also including Baxter (BAX), Insulet (PODD) and DexCom (DXCM), have declined sharply in the last month on signs that weight-loss drugs will reduce demand for their services.

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

Charting the Market

Some investors may see bearish risks emerging for the S&P 500.

First, it stalled last week at the price gap immediately after the September 20 Fed meeting. Technical analysts could watch for this level to become resistance.

Second, the index has also been making lower highs since July. That potentially increases the importance of the recent support above the 200-day moving average. A break of that level could produce a lower low and confirm a downtrend.

Third, Friday’s close is near the 4325 level where the index peaked in August 2022 and bounced this summer. Failure to hold this price zone could invalidate June’s breakout after Congress raised the debt ceiling.

Still, bigger issues are impacting sentiment. Further drops in inflation and interest rates would likely support stocks. But increased geopolitical tensions could have the opposite effect.

Biggest Decliners in the S&P 500 Last Week
DaVita (DVA)-18%
Hormel (HRL)-13%
Baxter (BAX)-13%
Lamb Weston (LW)-11%
Norwegian Cruise Line (NCLH)-11%
Source: TradeStation Data

The Week Ahead

This week brings the first big chunk of earnings season, with results due from about one-tenth of the S&P 500. There are also major housing numbers.

News from the Middle East could have an oversized impact as well. A large Israeli incursion into Gaza might be viewed bearishly, while de-escalation might relieve fears.

Tuesday brings retail sales and NAHB’s homebuilder sentiment index. Representative Jim Jordan could face a vote for Speaker of the House. Bank of America (BAC), Goldman Sachs (GS) and United Airlines (UAL) are some of the major companies announcing results.

Housing starts and building permits are due on Wednesday, along with crude-oil inventories. Tesla (TSLA), Netflix (NFLX) and Morgan Stanley (MS) report earnings.

Initial jobless claims and existing home sales are on Thursday. American Airlines (AAL) and Freeport McMoRan (FCX) issue quarterly results.

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

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