The Nasdaq Composite closed above 20,000 points for the first time on Wednesday, though it slipped slightly to end last week at just under the 20K mark. The rally has been driven by tech heavyweights such as Google, Tesla and Apple. However, the S&P 500 slipped into what Fundstrat Head of Research Tom Lee has called the “zone of uncertainty” this week, with the broad-based index dipping slightly after three consecutive weeks of gains.
As Lee had anticipated, investors responded to worries about inflation, particularly after CPI and PPI reports. Head of Technical Strategy Mark Newton noted that the CPI numbers showed “big progress” on two inflation components that have proven stubborn throughout 2024 – used cars and housing. However, the war against price increases continued to weigh on the broad-stock index. Worries about continued “stickiness” in inflation ramped up after Thursday’s PPI report showed hotter-than-expected wholesale-inflation numbers. (The PPI report is considered to be a precursor to consumer-inflation trends.)
This in turn raised worries about prospects for further rate cuts from the Federal Reserve. While the market continues to anticipate that the Federal Open Market Committee (FOMC) will cut rates by 25 bps on December 18 (as implied by Fed Funds futures trading), it also largely anticipates that the Fed will then pause its cutting cycle on January 29, 2025. (Fed Funds futures trading implied odds of a January pause at 81.0% as of Friday afternoon.)
For those worried that inflation will return, Lee has this to say: “I think a lot of people are making the mistake of seeing inflation as something that has an on-off switch. Inflation is probably going to have a second wave, but it’s not actually a spike or a resurgence. It’s more that we overshot to the downside and so it’s bouncing. I’d call it more of an echo.” In other words, Lee continues to see inflation tanking and declining.
The market’s reaction to the PPI numbers had Newton telling us that “backing and filling is possible next week ahead of the FOMC meeting,” but his work nevertheless shows that “the bull market rally looks back underway.” Furthermore, his examination into trends in the equal-weighted S&P 500 (RSP -0.42% ) has him optimistic about “small-caps, Transports, and the DJIA all pushing back to new highs into the end of the year.” That’s consistent with Lee’s base-case constructive scenario for the rest of the December.
Chart of the Week
Fundstrat Head of Research Tom Lee presented his highly anticipated2025 Market Outlook last week, taking viewers through all the reasons why markets could continue to climb until the end of 2025. Importantly, however, Lee does not see the all sectors of the market rising in unison. Nor, as illustrated in our Chart of the Week, does he see the advance continuing in a straight line.
AVGO 24.44% strong 20% gains are causing some outsized strength in the Semiconductor sector, despite Technology overall being lower today. SOX(Philadelphia Semiconductor sector) is up 2% but as can be seen, price has rallied to multi-day highs but remains at a key level of trendline resistance which will need to be exceeded before expecting a larger bounce out of this sub-sector which has been trending largely sideways since July. As can be seen on this daily SOX chart, the early strength failed right at 5185 and this is an important area for the Semis which when exceeded, would suggest a larger upside rally for this group. This would be further helpful to Technology which has already shown some good outperformance since the beginning of December.
CPI comes in in-line at +0.3% MoM, and 2.7% YoY causing a bit of a pop in US Equity futures and pullback in 2yr yields. largely keeps the Fed’s CUT plans intact as Swap market shows an 86% chance of a 25bp Cut. However, this is the largest print in 7 mths, but nonetheless, a largely expected result for today. Used cars only moderately higher, and Owners Equivalent rent at 0.2% is half of last month, so some progress on inflation in housing. and big progress on both of these
IWM -0.81% has now closed down from its opening price on nine of the last 10 trading sessions, down for 5 of the last 7 trading days, yet has merely given up 50% of the rally from mid-November. Thus, while it has weakened at a time of Large-cap Tech strength, i view the recent consolidation as being pretty benign and not all that meaningful. TD indicators show IWM to be one day away from generating a TD buy setup, and my expectation is the the maximum amount of downside happens to 233.6 before this starts to turn back higher. Overall, tomorrow’s CPI print very well could prove to be the catalyst for the low to this minor pullback in US Equities that’s occurred, and from an absolute basis, IWM is getting to a very attractive area of support which should occur this week.
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