Where S&P 500 breakout?

S&P 500 again didn‘t manage to break above 4,835 even if the bond yields retreated. HYG though lagged behind, and Russell 2000 remained muted. The 2y yield dramatically retreated to 4.14% - a move the 10y at 3.96% didn‘t mirror – arguably on Yemen strukes aftermath sinking in.

Stocks though still remain in risk-on, with the mainstream rate cutting hopes being based on disinflation, on victory over inflation – just as I wrote Friday, there is higher consumer inflation and it‘s hinting at a 3% yoy floor following which the Fed would be pressed to pick what to do about it and slowing economic growth, but we‘re good two quarters away from that.

Still, stock are marching higher for a top that isn‘t two quarters away – the key pointer to specify would be unemployment rate, productivity and retail sales coupled with overal services PMI health. So far so good – there is no worry about inflation being or becoming sticky, and likewise (justifiably) no worry over recession or no landing in the one to two quarters ahead.

Latest earnings were a mixed bag, with JPM standing out in bearish projections while C, WFC and BLK diverged in stock price moves, indicating that this isn‘t the time to be bearish financials – or either of the two sectors that I‘m describing in today‘s sectoral picks to outperform the S&P 500 over the next say 8 weeks. The weekly, daily and 4 hour charts all obviously hint at breakout.

Still, the Fed remains the greatest policy risk, with opinions about year end Fed funds rate dramatically diverging between FOMC members – while the spread was 25bp in Sep, it was 150bp in Dec, introducing significant volatility, which is part of the stock market reversal I had warned about on Jan 01. Whether we see a 25bp cut in Mar or not (odds are we do), the stock market views the glass as half full – and rate cut odds for Jan came quite back to 5.2% as well, which ain‘t really bearish stocks now, but the Red Sea situation would have an effect of inflation down the road.

S&P 500 and Nasdaq outlook

Source: www.stockcharts.com

What unfolds next, may resemble the second half of Nov, except that a deeper brief retracement is possible. This isn‘t though on the cards before we start approaching Friday‘s options expiry or Yemen truly surprises. Earnings to be reported next week, are unlikely to be bad, and I‘m looking for cautious guidance to be shaken off similarly to C, and better than WFC.

Crude Oil

Source: www.stockcharts.com

Crude oil likewise gave up much of the Yemen premium, but is set to recover shortly – if nothing, then on the Arctic cold spell hitting Midwest too. I can‘t be bearish gasoline and heating oil even if these aren‘t clearly rising yet – the bullish bias is there, the more economic growth gets questioned in the months ahead, together with sticky inflation recognition.

Copper is standing aside from the safe haven trades and in need of inflation liftoff to lift itself up, and in the low $3.70s it is long-term undervalued, especially considering the supply, demand and stockpiles dynamic.