Stocks Pause Near Record Highs Before Inflation, Earnings

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Stocks are pulling back as traders wait for key inflation data and the start of earnings season.

The S&P 500 fell 1.5 percent in the holiday-shortened period between Friday, December 29, and Friday, January 5. It was the first drop in 10 weeks, ending the index’s longest positive streak since 2004. About two-thirds of its members lost value.

There were several bearish headlines for major technology stocks. At least two analysts downgraded Apple (AAPL) amid signs of weak iPhone sales. The New York Times also reported the company may face antitrust action by the Justice Department. Semiconductors dropped after guidance from Mobileye (MBLY) suggested automotive demand is slowing.

Interest rates also climbed after non-farm payrolls and initial jobless claims showed a strong labor market. However other reports from the Institute for Supply Management showed slack in the economy. (Services had the shortest delivery times since 2020 and manufacturing prices fell at a quicker pace.)

The next big event for interest rates and the economy will probably be the consumer price index (CPI) inflation report on Thursday.

Healthcare Rallies

Biggest Gainers in the S&P 500 Last Week
Moderna (MRNA)+12%
Viatris (VTRS)+11%
Merck (MRK)+7.5%
Allstate (ALL)+7.1%
Verizon Communications (VZ)+6.6%
Source: TradeStation Data

Health care was the top-performing sector last week as investors rotated back to a group that lagged the market for most of 2023. Vaccine maker Moderna (MRNA) led the S&P 500 as flu and coronavirus cases increased. Merck (MRK) also rallied on an upgrade from Cowen.

(The industry could remain active this week with the 42nd Annual J.P. Morgan Healthcare Conference running from today through Thursday.)

Verizon Communications (VZ) also received a positive analyst note from KeyBanc. The telecom giant has been rallying since October, when strong quarterly results suggested that a long-term business turnaround had begun. Allstate (ALL) jumped to record highs after Morgan Stanley cited higher premiums and smaller underwriting losses.

Some energy stocks bounced last week as attacks in the Red Sea reduced shipping through the Suez Canal. The Biden Administration also announced plans to add 3 million barrels of oil to the Strategic Petroleum Reserve. However a large addition to gasoline inventories weighed on sentiment.

Technology stocks like semiconductors fell the most. Cruise ships led a decline in consumer discretionaries. Tesla (TSLA) also slid after fourth-quarter deliveries inched past forecasts.

S&P 500, daily chart, with key indicators and levels.

Charting the Market

Last week’s pullback came after the S&P 500 was overbought by various measures in mid-December. Wilder’s Relative Strength Index (RSI) reached its highest level since September 2020 and index rose furthest above its 50-day moving average since August 2022. TradeStation data also showed 96 index members hitting 52-week highs, the most since May 2021.

The benchmark ended last week near the low from December 20. It’s also trying to hold its 20-day moving average. That could make some chart watchers look for prices to hold support and continue their recent uptrend.

Further below, traders may look for prices to test their July peaks around 4600. The next potential level to the upside is around 4800 (near the peaks in late December and early 2022).

Interestingly, the Dow Jones Industrial Average broke out to all-time highs last month and remains above its peak from early 2022. The Nasdaq-100 briefly flirted with new highs before retreating. That could suggest large-cap value stocks like Boeing (BA), American Express (AXP) and Caterpillar (CAT) are taking leadership from growth.

The Week Ahead

This week begins quietly, aside from the J.P. Morgan healthcare conference over the next four days. The catalysts get more active on Thursday with key inflation data and important earnings on Friday.

Biggest Decliners in the S&P 500 Last Week
Enphase Energy (ENPH)-13%
Norwegian Cruise Line (NCLH)-11%
NXP Semiconductors (NXPI)-10%
VF (VFC)-10%
On Semiconductor (ON)-9.4%
Source: TradeStation Data

The Energy Department announces crude-oil inventories on Wednesday.

CPI inflation data is due at 8:30 a.m. ET on Thursday. Weekly jobless claims come at the same time.

Friday marks the beginning of earnings season as major financials issue results: JPMorgan Chase (JPM), Citi (C), Bank of America (BAC) and Wells Fargo (WFC). The producer price index (PPI) inflation report is also due.

Markets will be closed the following Monday, January 15, in observance of Martin Luther King Jr. Day.

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