Weekly Stock Market Update & SPY Technical Analysis

Weekly Stock Market Update & SPY Technical Analysis

Traders are complexed by last week’s price action after one of the most prominent companies on the market rocketed higher, but indexes and nearly all other stocks sold off.  The company we’re referring to is of course Nvidia, which reported another blowout quarterly earnings and moved more than 10% higher to a new all time high. Nvidia’s earnings were a point of concern leading up to the report because traders were afraid of it bursting the artificial intelligence “bubble”, but its numbers reassured markets that demand in the space is still booming.  The divergent move between Nvidia and the rest of the market could be a result of capital rotation from other parts of the market and back into semiconductors. Semiconductor companies like Nvidia, Broadcom, TSMC…etc. have been consolidating near the same range for a few months now while other stocks have rallied into new all time highs; so Nvidia’s earnings may have been the catalyst that triggered capital flow back into semiconductors and away from other overbought names on the market. 

Capital rotation is part of a healthy market. Bull rallies cannot be sustained if only a few companies are doing all the lifting so money flowing out of some stocks and back into semiconductors is a good signal. Semiconductors have led the market rally over the last 12 months and we expect them to continue doing so in 2024, but there is still the inflation test that markets have to overcome to maintain these highs. 

New inflation data will be released on Friday’s PCE Index so that will be a major test for markets. Inflation has been the biggest battle for the U.S. Economy over the last two years, and fears of it ticking back up have been felt over the last several reports. The PCE Index is The Fed’s preferred inflation gauge, and although it has significantly improved from the 2022 highs of 5.3%, it is still lingering around 3%, still away from The Fed’s 2% target. This means interest rates are likely to remain higher until inflation finally touches the 2% mark. High interest rate and tight monetary policies only make it harder for small and large businesses to grow, so the longer interest rates remain escalated, the more likely we’ll see their impact on company earnings in the coming quarters. For now, many companies are still surpassing expectations and posting strong guidance, but that’s based on the projections of multiple interest rate cuts still happening later this year; if those don’t happen, then projections may have to be adjusted and it will impact stock prices. This is why inflation reports are so critical, so Friday’s report will likely have a strong impact on how markets close out May. 

SPY Technical Analysis:

Between Wednesday and Thursday on SPY’s daily chart, we saw a pattern known as the “bearish engulfing” pattern, which typically signals weakness in a trend or a trend reversal. The last time we saw this pattern was on April 4th, which led to a multi-week sell off on the market so we must take note of the signal and watch for other signs of weakness. It’s important to note that nothing is ever definitive when it comes to technical analysis, so don’t put all your trust into one signal, but keep it in mind as charts develop. SPY managed to show some strength on Friday, so to start this week we’ll continue monitoring both sides to gauge direction. The S&P500 index itself may see choppy movement as capital rotation takes place on stocks within it, which will reflect onto its SPY ETF.