Happy Tuesday, traders…
Jeff here.
We had a little bit of a choppy start to the week. The market was going back and forth — slightly up, slightly down.
One thing I noticed amid this price action is that market leadership is broadening.
The big tech leadership group — “the magnificent seven” — is dropping off, with more stocks starting to turn around.
Example: Advanced Micro Devices, Inc. (NASDAQ: AMD) and many of its chipmaking counterparts didn’t show any follow-through on Friday.
Another recent AI runner, Dell Technologies Inc. (NASDAQ: DELL), was down more than 4% on Monday.
Oil — which has been in a soaring uptrend since January — was down to start trading on Monday as Israel withdrew forces from the southern Gaza city of Khan Younis over the weekend, bringing its troop count in the area to one of the lowest levels since the war with Hamas began last October.
Not to mention, tomorrow is one of the biggest macro trading events of the year (more on that later)…
All this to say, the market is getting interesting again as some of these mega-strong sectors are starting to show initial signs of weakness.
With that in mind, let’s get to my Tuesday Market Outlook…
The Consumer Price Index (CPI) Report
Looking forward, we have a big day tomorrow when the Consumer Price Index (CPI) report comes out.
It’s the big reveal, the moment of truth, showing us how prices have changed for everything from your morning coffee to your Netflix subscription.
Moreover, the Fed uses this data to inform its interest rate decisions.
Here’s what you’ll find in the CPI report:
Inflation Rate
As you know, rising inflation has been one of the biggest headwinds for stocks over the past few years.
CPI reports are where we find out how inflation is doing.
A rising or “hot” CPI suggests inflation is increasing, potentially leading to higher interest rates, which usually cause stocks to fall.
Conversely, a lower or “cooling” CPI indicates lower inflation, which often causes stocks to rally (as traders speculate about rates getting cut sooner).
Core CPI vs. Overall CPI
The core CPI, which excludes food and energy prices due to their volatility, gives a clearer picture of the underlying inflation trends.
The Core CPI is the one you should be highlighting…
Pay more attention to the core CPI to assess long-term inflationary pressures without the noise from short-term price swings in energy and food.
Sector-Specific Data
The CPI report also includes detailed breakdowns by sector, such as housing, transportation, and healthcare.
You can analyze these sections to understand how inflation is affecting specific pockets of the stock market.
Then, you can potentially use that data to influence your sector-specific trading.
Keep in mind that the CPI is computed based on a basket of goods and services that are deemed representative of average consumption patterns. It often compares current prices to the prices in a base year to calculate the rate of inflation.
This critical data could either reinforce the current bull run or give traders pause, dumping cold water on the recent enthusiasm with a dose of cold, hard stats.
If CPI data suggests inflation isn’t continuing to cool, those who’ve been riding the wave of market gains might start having second thoughts.
Recently, it seems like nothing can stop this bull market. But that might be changing…
Consider how violently bearish the price action was last Thursday, April 4, when Fed official Neel Koshkari rocked the market with comments suggesting that the central bank may not cut rates at all in 2024.
The S&P 500 and Nasdaq dropped more than 1.2% and 1.4%, respectively, in their biggest single-day declines since March 2023.
The reaction illustrated just how much the market cares about interest rates right now — and why you must pay close attention to tomorrow’s CPI report.
Remember that 10-year interest rates are still stubbornly high, up at 4.44% yesterday.
WARNING: If they go above 4.50%, I think we’re going to see some real selling.
Big Banks Set to Report Earnings
Later in the week, the focus should move to big bank earnings.
On Friday, we’ll get reports from Wells Fargo & Co. (NYSE: WFC) and Citigroup Inc. (NYSE: C).
Both of these stocks have been very strong recently.
Historically, banks don’t move that much on earnings (and they don’t move the rest of the market that much either).
So, probably not a big options-trading opportunity — but still important to track.
These reports may start getting traders a little bit anxious for what’s coming down the pike next week, and the week after that (tech earnings).
Plus, big banks are a crucial part of the U.S. economy…
The earnings reports can provide vital insight into average personal finance trends and overall consumer confidence (which seems to be waning recently).
There’s plenty to look forward to this week. The CPI report could really shake things up…
REMEMBER: Real traders thrive on volatility.
Stay disciplined, be patient, and follow your rules.
Happy trading,
Jeff Zananiri
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