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Dividend Dollars’ Outlook & Opinion
Last week’s call of neutral was pretty spot on for this week with the S&P 500 only down 0.3%. A pullback seemed needed for the market, now that we’ve been in one for two weeks what’s the outlook going forward? Let’s dive in!
This week we had two inflation readings with CPI and PPI. Neither headlines nor the core readings were big surprises in either direction, though reactions in the market were to the downside. Both The S&P 500 and the Nasdaq Composite are trading near their one month lows. The recent slide in stocks may be due to bearish seasonality, bearish technical which we have been following, and a lack of bullish catalysts as earnings comes to a close.
With earnings season roughly 90% done, S&P 500 companies have beat on revenue and EPS expectations roughly 58% and 79% of the time, respectively, per FactSet. Next week will have some high-profile reports to watch with $HD, $TGT, $CSCO, $WMT, $DE, and others.
From a technical perspective, this pullback was alluded to with the bearish divergence in price action compared to RSI, though I didn’t make note of this at the time. Price kept hitting higher highs but RSI was making lower highs.
Unfortunately, the channel we were watching in the below chart broke. So what have we got to look at this week?
Lucky for us, I have three SPX charts today, so we have plenty of coverage! This below chart is probably the chart we look at the most. We have a Fibonacci retracement from the highs of January 2022 to the lows of October 2022 providing us with many key levels. In addition, we also have key SMAs in place with the 50, 100, and 200 day lines. And lastly, we also have a key level near 4,450 that we mentioned last week (shorter white line). Last week, we said that key 4,450 level will need to be broken before the fib level sitting at 4,310 becomes a target. This week, $SPX ended almost right on that line. Below is our comment last week on that level.
The 50 day SMA also rose to sit right at that line as well. This spot will be a key level of support going into next week, however bearish momentum is strong, so this support could turn into resistance very quickly on Monday if we have a poor open.
With mixed economic data this, some key earnings reports next week, and not too heavy of a data week next week, price action should largely be driven by technicals and yields. With the markets sitting at support, and yields approaching highs, a timely retreat in yields paired with the market’s support could provide us with a relief rally. However, if yields don’t play ball, more selling could come. Technicals point to bounce, but yields aim higher, therefore my outlook for next week will be neutral again. Whichever direction we head, I think it will be steady throughout the week, meaning I expect a +/- 1% but am not confident in direction.
Weekly Market Review
Monday: Not much action today. Most of the moves came at the open, after that the broader market fought to keep and add to gains. Monday was a buy-the-dip kind of day that favored blue chips and value plays. This created a nice day for the $DIA, which saw only 10% of its number ending the day red.
The only data for the day was the June Consumer Credit Report, which came in at a $17.9B increase in credit, compared to an expected $13B. This was driven by an increase in nonrevolving credit. On the other hand, revolving credit saw its first decline since April 2021.
Tuesday: Tuesday was a big red day! It could have been much worse, but the indices recovered from their worst levels and ended the day near a ~-0.5% loss. Losses were driven by what seemed to be a consolidation effort, as weakness was broad-based.
Concerns on global growth created an excuse for selling efforts. These concerns came from a weaker than expected trade data out of China for July. It showed a 14.5% YoY decline in exports and 12.4% decline in imports. Adding to the concerns, $UPS issued a disappointing FY 23 outlook, citing weaking commerce demand. Weak bank stocks also contributed to this sad day after Moody’s downgraded 10 smaller sized banks and put a few other larger banks on watch.
Economic data for the day included the NFIB Small Business Optimism Survey and the June Trade Balance report.
The Small Business Optimism Survey came in at 91.9 for July, just under the expected 92.1 but over the prior 91.0. This is the highest level in 8 months and inflation concerns fell to the lowest level in nearly 2 years.
The Trade Balance report came in at -$65.5B compared to an expected -$65.1B. The lack of growth in exports and imports in this report is indicative of weaker demand overall, at home and abroad.
Wednesday: Wednesday was another losing day, especially with the sharp turn lower at the end of the day. The downside was wide, with many stocks taking hits, but mega cap losses had an outsized impact on the indices. $RSP closed at -0.3% and $MGK was down -1.1%.
Economic data for the day was only the MBA Mortgage Applications Index. The index was down 3.1% last week. Purchases were down 3% and refinances were down 4%.
Thursday: The indices started on a strong note, but closed flattish in another tight trading session. Solid buying interest came right out the gate, fueled by buy-the-dip mentality and good data from CPI and jobless claims.
However, that green start fell apart as mega caps faded from their highs and the 10-year note yield climbed above 4% after a bond auction. This pushed the indices to close near their lows for the day.
Data for the day included the CPI and the Jobless Claims Report.
Total CPI was up 0.2% MoM in July, as expected, and core CPI was also up 0.2% MoM, as expected. These figures were up 3.2% and 4.7% on a YoY basis, respectively, compared to 3.0% and 4.8% readings in June. There were no bearish surprises here, as both were spot on with the estimates. The shelter index accounted for more than 90% of the increase in the all-items index. Less shelter, the all-items index was up just 1% YoY.
Initial jobless claims for last week increased by 21k to 248k, compared to the expected 230k. Continuing claims decreased by 8k to 1.684M. Though job levels are still dramatically low levels that indicate a recession, they did move in a direction that shows some softening this last week. This is what the Fed expects, and probably hopes, to see.
Friday: Friday had us close the first full week of August on a mixed note. Rates jumped in response to a slightly hotter than expected PPI reading, which created a reason for more consolidation/risk-off mentalities from investors.
The 2-year T yield rose to 4.89%, the 10-year hit 4.17%! These moves created obvious pressure, as mega caps dragged and pulled down the indices with them. Market breadth also was mixed as winners lead losers at the NYSE but losers lead winners at the Nasdaq.
Economic data for the day included the PPI report and the University of Michigan Consumer Sentiment Reading.
The July PPI came in at +0.3%, compared to an expected +0.2% and a prior flat reading. The core PPI was also +0.3%, compared to an expected +0.2% and a prior -0.1%. The takeaway here is that wholesale inflation has come down since its peak in 2022, but the recent increase in energy costs are causing some concern that further improvement in inflation is going to be delayed.
The preliminary august consumer sentiment reading came in at 71.2, above the expected 70.9 but just below the prior reading of 71.6. The report showed little move in sentiment, due largely in part to steady inflation expectations. The year ahead and five-year ahead expectations fell by 10 basis points each. Will be interesting to see how this moves in the next quarter with the deceleration in inflation appearing to slow this last month.
That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.
And if you like updates like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week. I have also started a Twitch Channel called Games N Gains! Every Thursday at 6PM MST I go live to hang out, play games, and chat with y’all about stocks, charts, fundamentals, and anything else you like! I hope to see you there!
Regards, Dividend Dollars