Week Ahead on Wall Street (SPY) (QQQ): CPI sets equities up for more losses and 50bps hike

• Equity market losses accelerate as Friday progresses.
• Yields remain calm on Friday as 10-year drops below 2%.
• Risk-off back on as Nasdaq dumps over 3% as consumer confidence falls.

Equity markets resumed the theme of 2022 after yet another shockingly high inflation number on Thursday. If not for last Friday's strong employment number then we would be staring stagflation straight in the face and looking at a probable inversion in the yield curve. As it is we may be headed for inversion anyway as the 10 year - 2 year spread narrowed to 42 bps after the CPI data. Equity markets attempted to keep calm and carry on in early trade on Friday. But once the brief rally failed it was a case of rising panic selling and position closing. The net results a 3% loss for the Nasdaq and just under 2% for the S&P 500. Of course, the University of Michigan Sentiment number gave bears the reason they needed to squeeze any lingering hope for bulls. This number should not have come as a surprise given recent weakness in other consumer indicators but the reaction was telling. Bears are in control now.

S&P 500 (SPY) forecast

We had identified $458 as a key level numerous times during the week and it did indeed prove key to the sell-off. Yet another test on Thursday before the CPI, a case of the pump and then the dump. Now that level is far in the distance the SPY will look to test our other key level at $428. This really does need to be broken to maintain the trend and set a lower low. Perhaps a move to $423 or more likely $414 before we can then rally. Nothing goes down in a straight line remember. 

SPY chart, daily

Fund flows

Just in time for the sell-off we saw net inflows to equity ETF's last week. The biggest gainer according to Refinitive Lipper Alpha was SPY, IVV (SP500 core), and SCHD a dividend ETF. Meanwhile, the Russell 2000 (IWM) saw the biggest outflow. 

Investor sentiment

This will get worse but the latest investor survey from the American Association of Individual Investors shows a rebound for sentiment last week. Well not exactly a rebound as bulls dropped off but investors became more neutral, perhaps waiting for the CPI as this data is up until Wednesday. Expect next week's number to worsen then.

 

Source:AAII.com

S&P 500 (SPY) Earnings

Refinitiv Lipper Alpha notes 358 companies from the S&P 500 have now reported and 78.2% have beaten estimates. The problem is the worsening outlook for many. Next week only 59 companies report from the S&P 500 block as earnings season draws to a close. 

Source: Benzinga Pro

Economic releases

A relatively light week next in terms of both macro and micro-related data. Earnings season drops off and only retail sales really look interesting next week. The next period revolves around yield watching until the March Fed meeting. Risk is likely to be off, growth and meme stocks will suffer and we expect value and energy to continue to outperform. Also do not forget financials. Higher and ever-higher rates should be a tailwind for some.