Following a harrowing week in global markets, the ability of the market to defend its 200-day moving average and close in the green on a Friday were net positives for the investor psyche, Prudential’s Chief Market Strategist Quincy Krosby said Monday in her weekly “Connecting the Dots” outlook.
“It looks as if the market is trying to form a bottom,” Krosby said. “Typically, in markets that are very volatile, especially during a very nasty week, you do not see managers, traders wanting to go long in buying something going into a weekend.”
Still, traders will be watching for signs of “forced” selling into any strength, and the possibility of continued unwinding of short volatility trades, the same type that exacerbated the selling pressure last week.
“The 200-day moving average is almost sacrosanct,” Krosby said. “If you don’t hold that, you’ll see the algorithms kick in, and a market downturn becomes even deeper.”
Given that the sell-off began with an unexpected positive surprise in wage growth, the data focus this week will be on two important inflation gauges and their effect on the ten-year Treasury yield: Wednesday’s CPI report (Consumer Price Index), followed by Thursday’s PPI report (Producer Price Index).
“The market’s going to be very sensitive to this. The 10-year yield is creeping up. If the numbers from the CPI and PPI are lower, you’ll see it inch downward and that could be a positive for the market,” Krosby said.
Federal Reserve speakers haven’t signaled that they’re worried about a downturn. In fact, head of the New York Fed Bill Dudley called the decline in stocks, “small potatoes.”
“I guess it’s small potatoes, but it was a hot potato for many in the market,” Krosby said. “But you can understand their thinking, that the market shot up too quickly, too fast, and needed to reprice.”
Earnings will continue to dominate the headlines as long as markets remain relatively calm (see the list of important earnings releases below).
Tuesday morning’s National Federation of Independent Business survey is another indicator to watch. “I like to pay very close attention to what they have to say, as small business owners are on the front line of the tax cuts and are focused on expected sales,” Krosby said. “If they believe they’ll have more sales, they will hire more people.”
Meanwhile, the long-awaited infrastructure plan released by the White House has already drawn criticism. Even the Republican party is wary of more spending that could add to the deficit and increase inflation. “The chatter behind it is it puts too much pressure on local municipalities for financing,” Krosby said.
Overall, she said, there will be a focus on the tone of the market and how the market closes throughout the week.
Earnings to watch:
Monday: Loews; Brighthouse Financial; Vornado Realty Trust
Tuesday: PepsiCo; Under Armour; Baidu; Martin Marietta Materials; MetLife; Occidental Petroleum
Wednesday: Cisco Systems; Applied Materials; Dr Pepper Snapple; TripAdvisor; Marriott; Wyndham Worldwide; Williams Cos
Thursday: CBS; Shake Shack; TransCanada; Allscripts Healthcare; Avon Products; Brookfield Asset Management
Friday: Coca-Cola; Kraft Heinz; Campbell Soup; John Deere; Ryder System; Vulcan Materials; J.M. Smuckers
This week’s data releases:
Monday: Federal Treasury Budget
Tuesday: National Federation of Independent Business (NFIB) Small Business Optimism survey
Wednesday: CPI; Retail Sales
Thursday: Initial Claims; PPI; Industrial Production; National Association of Homebuilders (NAHB) survey
Friday: Housing Starts; Consumer Sentiment
Read Quincy Krosby’s full Q1 Market Commentary: Turning the Page.
The views and opinions are those of the author at the time of publication and are subject to change at any time due to market or economic conditions. This is solely for informational purposes. This is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.