Weekly Trader's Outlook

Volatility Resurfaces in Stocks as Tariff Headlines Persist

February 7, 2025 Nathan Peterson
Stocks are on track for a down week as investors attempt to digest what impact tariff announcements, and subsequent negotiations, will have on the economy.

The Week That Was

If you read last week's blog you might recall that my forecast for this week was "moderately bearish," citing a bearish technical setup and tariff uncertainty. My forecast turned out to be wrong as the S&P 500 (SPX) is on track to be up ~1.5% on the week at the time of this writing. What's remarkable is that stocks moved higher throughout the week despite additional tariff headlines (25% tariff on all imported steel and aluminum announced, reciprocal tariffs under development) and hotter-than-expected monthly inflation data (see "Economic Data, Rates & the Fed" section below). Honestly, I'm surprised by the resiliency of the markets, but perhaps there is a belief that the warm inflation data will help slow the pace and magnitude of potential Trump tariffs. It's also unclear how long any tariffs will be in place, whether they are solely a negotiating tactic and whether they will ultimately have any inflationary impact. Markets appear to be willing to overlook any potential consequence unless and until it manifests in the economic data. Outside of this morning's Retail Sales miss, which may have been weather related, the economic data has been strong, as has Q4 corporate earnings (+15% year-over-year per FactSet). So, from a high-level, intermediate-term perspective, it seems that stocks can maintain a bullish bias provided the economic data and earnings growth estimates hold up and yields on the 10-year remain below the mid-January high of 4.80%. Yes, there is high level of uncertainty in the current geopolitical environment, so it may be prudent for traders to remain flexible and not get lulled into complacency.

Outlook for Next Week

At the time of this writing (1:50 p.m. ET), stocks are mixed, with the SPX currently on track to make a new all-time closing high (DJI - 64, SPX + 8, COMP + 65). As referenced in the "Technical Take" section below, an SPX close above 6,118 would represent a new all-time high, and this has the potential to attract fresh incremental capital. I acknowledge the price action has been bullish and resilient in the face of counter forces (more tariffs, warmer inflation), but my logical mind has trouble believing that stocks are ready to push another leg higher next week. We don't have any significant market-moving catalysts until NVIDIA earnings on Feb 26th or personal consumption expenditures (PCE) on Feb. 28th in my view, and we only have a four-day trading week since markets are closed on Monday in honor of Presidents' Day. Lastly, bond yields have been very cooperative for the bull (10-year yields are at a weekly low right now), which could be bullish for stocks if they continue to ease next week. I understand we are in an environment which entails higher headline risk, but net-net the setup looks favorable to the bulls next week, though I don't think stocks are going to necessarily race higher. Therefore, my overall forecast for next is for "slightly bullish."  What could challenge my outlook? If the SPX fails to close at a new high today and falls back into its recent trading range this will likely result in weekly losses.

Other Potential Market-Moving Catalysts:

Economic:

  • Monday (2/17): no reports
  • Tuesday (2/18): Empire State Manufacturing, NAHB Housing Market Index, Net Long-Term TIC Flows
  • Wednesday (2/19): Building Permits, EIA Crude Oil Inventories, Housing Starts, MBA Mortgage Applications Index
  • Thursday (2/20): Continuing Claims, EIA Natural Gas Inventories, Initial Claims, Leading Indicators, Philadelphia Fed Index
  • Friday (2/21): Existing Home Sales, University of Michigan Consumer Sentiment - Final

Earnings:

  • Monday (2/17): UFP Industries Inc. (UFPI), Noble Corporation PLC (NE), Transocean Ltd. (RIG)
  • Tuesday (2/18): Medtronic PLC (MDT), Vulcan Materials Co. (VMC), Baidu Inc. (BIDU), Watsco Inc. (WSO), Genuine Parts Co. (GPC), Arista Networks Inc. (ANET), Occidental Petroleum Corp. (OXY), Cadence Design Systems Inc. (CDNS)
  • Wednesday (2/19): Analog Devices Inc. (ADI), Garmin Ltd. (GRMN), Clean Harbors (CLH), Wix.com Ltd. (WIX), Wingstop Inc. (WING), Carvana Co. (CVNA), American Water Works Company (AWK), Toast Inc. (TOST)
  • Thursday (2/20): Walmart Inc. (WMT), Alibaba Group Holding Ltd. (BABA), Southern Co. (SO), NetEase Inc. (NTES), Cheniere Energy Inc. (LNG), Booking Holdings Inc. (BKNG), Newmont Corporation (NEM), Live Nation Entertainment Inc. (LYV)
  • Friday (2/21): Balchem Corp. (BCPC), TXNM Energy Inc. (TXNM), Telephone and Data Systems Inc. (TDS)

Economic Data, Rates & the Fed:

Markets received a solid dose of economic data this week, highlighted by hotter-than-expected monthly inflation data. While markets initially responded as expected to the hot consumer price index (CPI) report on Wednesday, stocks recovered nearly all losses by the end of the day. Additionally, Thursday's producer price index (PPI) release was met with both bond and equity buying, even though the headline print was above estimates. The reason is that there were several components in the PPI report that may provide a favorable read-through for the PCE report which comes out later this month. For example, in the PPI report physician care fell 0.5%, domestic airfares declined by 0.3% and brokerage services prices declined 2.2%. January Retail Sales significantly missed estimates, but stocks didn't react much to the softness because recent fires and storms may have negatively impacted the data. Here's the breakdown from this week's reports:

  • Consumer Price Index (CPI): Headline month-over-month (MoM) climbed 0.5% in January, above the +0.3% expected and represents the largest gain since August of 2023. On a year-over-year (YoY) basis headline CPI increased 3.0% which was above the +2.9% economists had expected.
  • Core CPI: Increased 0.1% more than expectations on a MoM basis (+0.4% vs. +0.3% est.) and 0.2% above estimates on a YoY basis (+3.3% vs. + +3.1% est.).
  • Producer Price Index (PPI): Increased 0.1% more than expectations on a MoM basis (+0.4% vs. +0.3% est.) and 0.3% above estimates on a YoY basis (+3.5% vs. + +3.2% est.).
  • Core PPI: Was in-line on a MoM basis (+0.3% vs. +0.3% est.) and 0.3% above estimates on a YoY basis (+3.5% vs. + +3.2% est.).
  • Retail Sales: Declined by the most in nearly two years in January (-0.9% vs. +0.1% est.). Excluding auto, Retail Sales declined 0.4% versus expectations for a 0.4% increase, while the "control group," which excludes several volatile categories, declined 0.8% versus +0.8% in the prior month.
  • NFIB Small Business Optimism Index: Fell by 2.3 points in January to 102.8. The Uncertainty Index rose by 14 points to 100, representing the third highest reading ever.
  • Initial Jobless Claims: Decreased to 213K from 220K in the prior week, but below the 221K expected. Continuing Claims decreased 36K to 1.85M from last week.
  • The Atlanta Fed's GDPNow "nowcast" for Q1 GDP is unchanged at +2.9% versus last Friday.

Bond yields saw a mid-week spike following the CPI data but reversed course and are on track to be slightly lower on the week. Compared to last Friday, two-year Treasury yields are down four basis points to the current 4.25% from 4.29% while 10-year yields are little changed at 4.445% versus 4.448%.

Near-term expectations around potential rate cuts from the Federal Reserve saw some intra-week volatility due to the inflation data but subsequently settled back down. Looking at the Bloomberg probabilities, the probability around a March rate cut is down to 2% from 10% last Friday and the first theoretical 100% chance of a 25-basis point rate cut stands at the September Federal Open Market Committee (FOMC) meeting. Markets are still expecting somewhere between one to two 25 basis point cuts in 2025.

Technical Take

S&P 500 Index (SPX + 2 to 6,117)

This week's move higher in the S&P 500 index has put the index right at the top of the trading range (~5,960-6,118) that has been in place over the past month. The all-time closing high for the index is 6,118 back on January 23rd, and it closed just three points below that level yesterday. Today's close is important, and unfortunately, I don't have the luxury of seeing where the index closes at the time of this writing, so the near-term set-up is somewhat binary–a close above 6,118 would be considered bullish, but a close below this level today would leave me cautious, wondering if the SPX is going to pullback into the range once again. Near-term technical translation: bullish if SPX closes above 6,118, slightly bearish if SPX closes below 6,118
 

SPX up against the top of its 1-month consolidation zone - will it break out, or fall back into the range?

Source: ThinkorSwim trading platform

Past performance is no guarantee of future results.

Russell 2000 Index (RUT - 3 to 2,278)

The Russell 2000 index (RUT) remains in a sideways trend and the index is still struggling to make a definitive push above resistance at the 50-day Simple Moving Average (SMA). Additionally, the 50-day SMA, a measure of intermediate-term trend, has been rolling over which isn't bullish. Until the index can register a decided push (think relatively long green candle on above average volume) above this resistance level, I'm in the bearish camp. Near-term technical translation: bearish
 

50-day SMA still acting as near-term resistance for the Russell 2000.

Source: ThinkorSwim trading platform

Past performance is no guarantee of future results.

Cryptocurrency News:

U.S. President Donald Trump signed an executive order to create a Presidential Working Group on Digital Asset Markets, while the Senate Banking Committee created a first-ever Subcommittee on Digital Assets, to be chaired by crypto enthusiast Senator Cynthia Lummis of Wyoming. The House Financial Services Committee already has a digital assets subcommittee, and the two are expected to coordinate their efforts with the White House. "All of it is another sign that bipartisan legislation on crypto is going to be a high priority in 2025," said Michael Townsend, managing director of legislative and regulatory affairs at Schwab.

Market Breadth:

The Bloomberg chart below shows the current percentage of members within the S&P 500 (SPX), Nasdaq Composite (CCMP), and Russell 2000 (RTY) that are trading above their respective 200-day Simple Moving Averages (SMA). Stocks are on track for modest weekly gains, but there wasn't a corresponding expansion in market breadth. On a week-over-week basis, the SPX (white line) breadth ticked slightly up 60.80% from 60.00%, the CCMP (blue line) ticked down to 47.48% versus 48.36%, and the the RTY (red line) edged down to 53.49% from 54.70%.

Market breadth little changed week-over-week.

Source: Bloomberg L.P.

Market breadth attempts to capture individual stock participation within an overall index, which can help convey underlying strength or weakness of a move or trend. Typically, broader participation suggests healthy investor sentiment and supportive technicals. There are many data points to help convey market breadth, such as advancing vs. declining issues, percentage of stocks within an index that are above or below a longer-term moving average or new highs vs. new lows.

This Week's Notable 52-week Highs (162 today): CME Group Inc. (CME - $2.03 to $248.08), DoorDash Inc. (DASH + $2.93 to $208.57), GE Aerospace Inc. (GE - $1.64 to $206.74), Gilead Sciences Inc. (GILD - $0.07 to $105.89), Upstart Holdings Inc. (UPST - $0.32 to $83.84), Walmart Inc. (WMT - $0.45 to $104.60)

This Week's Notable 52-week Lows (26 today): Abercrombie & Fitch Company (ANF - $0.96 to $109.13), Biogen Inc. (BIIB - $2.23 to $136.21), Diageo PLC (DEO - $0.77 to $108.60), Kraft Heinz Company (KHC + $0.02 to $29.27), Lennar Corp. (LEN + $1.17 to $124.92), Martin Marietta Materials Inc. (MLM - $3.13 to $528.53)

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