Stocks Hesitate as Inflation Returns Before the Fed

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Stocks could be hesitating before a key Federal Reserve announcement on Wednesday.

The S&P 500 slid 0.1 percent between Friday, March 8, and Friday, March 15. The index has lost value for two consecutive weeks, which hadn’t happened since the current rally began in November.

Signs of persistent inflation weighed on sentiment. The consumer price index (CPI) and producer price index (PPI) for February rose more than expected. Energy drove much of the increase, but other categories like air fares and insurance kept going up. At the same time, crude oil jumped to a four-month high and copper hit an 11-month high. Initial jobless claims were also below forecasts, reflecting a potentially strong job market.

Borrowing costs jumped in response, with Treasury yields erasing declines over the previous three weeks.

Biggest Gainers in the S&P 500 Last Week
Freeport-McMoRan (FCX)+12%
3M (MMM)+12%
Oracle (ORCL)+12%
Costar (CSGP)+11%
Valero Energy (VLO)+9.5%
Source: TradeStation Data

Another report from the Commerce Department showed disappointing growth in retail sales. Bank of America strategist Michael Hartnett said the “Goldilocks” period that began in November could be ending. (Goldilocks means inflation isn’t too hot and growth isn’t too slow.) He cautioned it could be replaced by “stagflation”: higher inflation and slower economic growth.

Energy Rallies

Energy was the top-performing sector last week, climbing almost 4 percent. It rallied as investors increased bullish positions on crude oil futures and as inventories tightened. Energy got a further boost after Ukraine attacked Russian refineries, reducing global supplies of gasoline and diesel.

Crude oil futures (@CL), weekly chart, with non-commercial net positions from the commitment of traders report. Green and red arrows show increases and decreases.

Energy is now the leading sector on a year-to-date basis, according to TradeStation data.

Materials rose almost 2 percent, their eighth straight positive week. That’s their longest winning streak since the stock market rebounded from the Global Financial Crisis in 2009.

Solar energy stocks, biotechnology and banks fell the most last week. Real estate, semiconductors and small caps also lagged the broader market.

Copper producer Freeport McMoran (FCX) was the biggest gainer in the S&P 500. It followed copper prices higher after Chinese smelters reduced output. 3M (MMM) also climbed after raising its guidance. The industrial conglomerate is the worst-performing member of the Dow Jones Industrial Average over the last five and 10 years, according to TradeStation data. The company just completed a spinoff and has a new CEO starting in May. Has a turnaround begun?

Oracle (ORCL) also rallied after strong quarterly results suggested it’s starting to benefit from AI-related demand.

Electronics manufacturing company Jabil (JBL) fell the most after revenue missed estimates. Southwest Airlines (LUV) dropped after management cut guidance because of delays with Boeing (BA) aircraft. Dollar Tree (DLTR) also slid on weak results and guidance.

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

Charting the Market

While the S&P 500 has trended smoothly higher since late October, some chart watchers may see evidence it’s due for a pause.

First, the week of March 4-8 featured a higher high and higher low than the preceding week. That kind of “outside week” reflects an inability to claim new highs. It was followed by an “inside week,” as prices stayed within the previous range. That tightening may also reflect a slowing of the uptrend and potential reversal.

Next, Wilder’s Relative Strength Index (RSI) has slid this month as the broader index plods to new highs. Such “bearish divergence” may reflect weakening of the uptrend.

Traders could watch for potential support at the 21-day exponential moving average, where the index bounced in January and late February.

At least two other charts could be important. The 10-year U.S. Treasury yield is climbing back toward 4.324, an important level since 2008. Returning above that level could potentially suggest the bond market expects higher rates.

Second, Cboe’s Volatility Index (VIX) has refused to make new lows since December. That may reflect lingering fears.

The Week Ahead

Biggest Decliners in the S&P 500 Last Week
Jabil (JBL)-19%
Enphase Energy (ENPH)-17%
Southwest Airlines (LUV)-17%
Dollar Tree (DLTR)-14%
EQT (EQT)-11%
Source: TradeStation Data

The Fed dominates this week’s calendar. There are a few other events.

AI could be in the news with Nvidia’s (NVDA) GTC developer conference starting today. NAHB’s homebuilder sentiment index is also due.

Housing starts and building permits follow tomorrow morning.

The big event is at 2 p.m. ET on Wednesday, when the Fed issues monetary policy and its outlook for future rates. (It’s also known as the “dot plot.”) Chair Jerome Powell will speak about 30 minutes later. Crude-oil inventories come earlier in the session and Micron Technology (MU) reports earnings after the closing bell.

Thursday features initial jobless claims and results from Nike (NKE) and Lululemon (LULU).

Nothing important is scheduled for Friday.

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