Stocks Break Out as Inflation Cools and China Steps In

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Stocks have broken out as inflation cools and China moves to support its ailing property market.

The S&P 500 rose 1.5 percent between Friday, May 10, and Friday, May 17. It was the fourth straight positive week, with the index passing 5,300 for the first time. The Dow Jones Industrial Average also made history by crossing 40,000.

The big news came on Wednesday, when April’s consumer price index (CPI) rose less than expected by economists. It was the first below-consensus reading since October’s. The year-over-year increase of 3.6 percent was the lowest reading since 2021. Retail sales, housing data and regional manufacturing reports were also soft. Those numbers reduced worries about inflation and pushed down interest rates.

China also authorized local governments to purchase unsold real estate. It was the most aggressive support yet to the country’s ailing property market, following moves in April to boost confidence in the stock market.

Biggest Gainers in the S&P 500 Last Week
Moderna (MRNA)+13%
Insulet (PODD)+13%
Super Micro Computer (SMCI)+11%
Advanced Micro Devices (AMD)+8.3%
Chubb (CB)+7.6%
Source: TradeStation Data

The combination of news was especially bullish for metals. (Softer U.S. data weakened the dollar, while the Chinese move potentially supports demand.) Copper futures (@HG) surged 9 percent to their highest level in more than two years. Silver futures (@SI) had their highest weekly close over a decade.

Roaring Kitty’s Comeback

Even before the inflation report lifted stocks, sentiment appeared more bullish. “Roaring Kitty,” the trader who inspired the “meme stock” craze in 2021, posted on social media for the first time in three years. That triggered short-squeeze rallies in GameStop (GME) and AMC Entertainment (AMC).

Strategists were also positive. Brian Belski of BMO Capital raised his price target on the S&P 500, saying bullish momentum in May could continue in coming months. “We think the markets head higher as people continue to reallocate into stocks,” he told CNBC.

Marc Chaikin also said stocks endured a short-term pullback and could rally into the November 5 election. Ron Insana added that downward pressure in food and air fares could pull inflation lower. Separately, FactSet reported that last earnings season saw the fewest companies mention inflation in almost three years.

Tech Stocks Rally

Technology was the strongest sector last week. Companies associated with Artificial Intelligence (AI), like Super Micro Computers (SMCI), advanced before Nvidia’s (NVDA) earnings report on Wednesday afternoon. The Philadelphia Semiconductor Index ($SOX) also had a new weekly closing high. Real estate was the second-best performer thanks to lower interest rates.

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

Still, the biggest movers were at the industry level: Chinese Internet stocks, silver miners, gold miners and industrial metals. Software, which has lagged the market for most of the year, had its best week since January.

That kind of price action is consistent with lower interest rates, a weak U.S. dollar and slower economic growth. Traditional cyclical sectors that benefit from a strong economy lagged: industrials, chemicals and consumer stocks.

Charting the Market

Last week’s gains came after the S&P 500 returned above its 50-day moving average. Its advance / decline line continued to hit new records, a sign of positive breadth across the market.

Some chart watchers may expect follow-through after the index closed at a new high for the first time in seven weeks. Comparable moments, with breakouts after consolidation periods, were followed by more gains. (Recent examples include December 8 and January 12.)

There are few apparently bearish patterns on the S&P 500. Other charts support a potentially bullish view of the situation.

Cboe Volatility Index ($VIX.X), weekly chart, showing levels and events.

First, the 10-year Treasury yield continued lower after stalling below its late-October high. That suggests investors are less worried about inflation and interest-rate hikes. The U.S. dollar index followed a similar path.

Second, Cboe’s volatility index ($VIX.X) ended Friday’s session at 11.99. It was the lowest weekly close since September 2018. That may reflect limited fear in the market.

The Week Ahead

This week is relatively quiet, with the two most prominent events scheduled for Wednesday.

The main items for today are results from Palo Alto Networks (PANW) and Zoom Video Communications (ZM) after the closing bell.

Biggest Decliners in the S&P 500 Last Week
Paramount Global (PARA)-7.9%
Clorox (CLX)-5.4%
FMC (FMC)-5.3%
Lululemon Athletica (LULU)-5.1%
Martin Marietta Materials (MLM)-4.9%
Source: TradeStation Data

Lowe’s (LOW), Macy’s (M) and Chinese EV-maker Xpeng (XPEV) report tomorrow.

Wednesday’s big items are minutes from the last Federal Reserve meeting at 2 p.m. ET and NVDA earnings after the closing bell. The Fed minutes could influence interest rates, while NVDA could impact a wide range of technology stocks — especially those associated with AI. The Energy Department releases oil inventories earlier in the day.

Bilibili (BILI), Ralph Lauren (RL) and Medtronic (MDT) issue their numbers on Thursday. Initial jobless claims are also due.

Durable-goods orders are scheduled for Friday morning.

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