Stocks Have Had a Healthy Pullback. Will Buyers Step In?

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Stocks have had their biggest pullback since the current rally began. Will buyers step in?

The S&P 500 fell 1.6 percent between Friday, April 5, and Friday, April 12. It was the biggest weekly drop since October. The index also touched its 50-day moving average for the first time since early November. That could make some investors waiting on the sidelines see opportunity to add exposure to stocks — especially if geopolitical tensions ease.

That seems to be one hope so far. While Iran attacked Israel on Saturday, damage was minor and there was little sign of escalation. Energy futures were subdued on Sunday evening and stock futures rose, suggesting that investors think the worst of the crisis has passed. Further news on the situation will likely dominate sentiment early this week.

The risk of inflation could also remain an issue. The consumer price index for March rose more than expected, pressured by shelter, auto insurance, medical care and clothing. That diverse set of categories suggested that inflation is more widespread than hoped. Minutes from the last Federal Reserve meeting echoed that fear. As a result, the number of expected Fed rate cuts this year dropped from three to two (according to CME’s FedWatch tool).

Biggest Gainers in the S&P 500 Last Week
GE Vernova (GEV)+9.2%
Insulet (PODD)+6.2%
First Solar (FSLR)+4.5%
Enphase Energy (ENPH)+4.2%
Apple (AAPL)+4.1%
Source: TradeStation Data

Earnings will also gain importance in the coming weeks as major companies issue quarterly results. At least 42 members of the S&P 500 report this week. The big deluge begins on April 24 with Meta Platforms (META).

FactSet currently predicts profits will increase at least 7 percent this season.

Broad Declines

Last week’s declines were very broad, according to TradeStation data. Ninety-five percent of the S&P 500’s members lost value, along with every major sector.

Financials led to the downside as interest rates increased. JPMorgan Chase (JPM) contributed to the drop after failing to increase its profit guidance. Another financial, Globe Life (GL) had its biggest weekly drop ever after a bearish report by the short-seller group Fuzzy Panda. GL rejected the claims and promised to rebut them “more fully … in the near future.”

Globe Life (GL), daily chart, showing last week’s sharp decline.

Materials, small caps, housing and real-estate stocks also fell sharply.

CarMax (KMX) slid after a combination of higher interest rates and tighter lending standards hurt auto sales. Arista Networks (ANET) also fell after Rosenblatt Securities said its Ethernet products could lose market share to Nvidia (NVDA). The firm issued a double downgrade (from Buy to Sell) and slashed the target price from $330 to $210.

Technology had the smallest drop last week as Apple (AAPL) rebounded and key AI stocks held recent lows.

Charting the Market

Last week’s slide in the S&P 500 may interest some dip buyers, however there could be reasons to worry about a deeper correction.

On the positive side, bulls may like how the index tested and held its rising 50-day moving average. They could also notice the strength of its recent uptrend and conclude that two weeks of downside represent a buying opportunity.

Bears, however, might worry about signs of negative momentum and the lack of nearby support. They might eye weekly lows like 5091 from March 11 or 5057 from March 5 for potential retests. (The index ended Friday at 5123.)

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

Yields and Oil

Two other charts could impact trading. First, the yield on the 10-year Treasury note rose to its highest level since November. The inflation data, plus a weak auction of new securities and wider fiscal deficit also hit prices and boosted yields. Further upside could raise borrowing costs and potentially hurt stocks.

Second is crude oil, which has climbed since February on tight inventories and strong demand. Increased tensions in the Middle East could push prices even higher — especially if Iran threatens to close the Strait of Hormuz.

The Week Ahead

Biggest Decliners in the S&P 500 Last Week
Globe Life (GL)-46%
CarMax (KMX)-12%
Solventum (SOLV)-10%
Zoetis (ZTS)-9.6%
Arista Networks (ANET)-8.9%
Source: TradeStation Data

Given the geopolitical situation, news from the Middle East could be the main item in the near term. Upcoming economic data is likely to be less important because it doesn’t impact on the Fed (unlike inflation last week).

This morning features retail sales and earnings from Goldman Sachs (GS). NAHB’s homebuilder sentiment index comes shortly after the opening bell.

Bank of America (BAC), Morgan Stanley (MS) and UnitedHealth (UNH) follow tomorrow morning. Housing starts and building permits are also due.

Wednesday brings crude-oil inventories.

Initial jobless claims are on Thursday, along with earnings from Taiwan Semiconductor (TSM) and Netflix (NFLX).

American Express (AXP) and Procter & Gamble (PG) report on Friday.

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