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A Bullish Pattern Hangs in Balance this Busy Week

U.S. stocks rose last week after inflation data suggested the Fed is succeeding in quelling price increases without much damage to the economy. Investors took the year-over-year decline in earnings in stride, believing it would provide less room for the Fed to raise interest rates. The S&P 500 is just a few points away from forming a bullish golden cross. The week ahead includes the Fed meeting, earnings, and the jobs report.

December inflation data suggested that the Federal Reserve is succeeding in curbing price increases without a material increase in unemployment. The Fed’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) price index, which excludes food and energy prices, rose 4.4% in the year through December. In the 12 months through November, the core PCE price index had risen 4.7%.

Gross domestic product growth in the fourth quarter exceeded economists’ forecasts. The Bureau of Economic Analysis (BEA) reported the economy expanded at an annualized rate of 2.9% during the fourth quarter. Economists surveyed by Dow Jones expected the GDP to grow by 2.8%.

Over 100 members of the S&P 500 index reported their fourth-quarter earnings last week, completing the first third of the reporting season. According to FactSet, nearly 70% of reporting companies have exceeded analysts’ EPS forecasts. The aggregate earnings for the S&P 500 index are on track to decline 5% year over year. Investors have perceived the decline in earnings as good news since it may leave less room for the Fed to raise interest rates.

For the week ending January 27, the S&P 500 (SPY) rose 2.5%. Nine of the 11 sectors advanced. Consumer discretionary (XLY) gained the most, while healthcare (XLV) lost the most.

Sector returns for the week ending January 27, 2023

Leading and lagging sectors for the week ending January 27, 2023.

The S&P 500’s top 10 winners included the following:

1. Consumer Discretionary Sector

  • Tesla, (TSLA) +33% – The week’s top performer in the S&P 500.

2. Information Technology Sector

  • Western Digital (WDC) +17%
  • Seagate Technology (STX) +16%
  • NVIDIA Corp. (NVDA) +14%

3. Communication Services Sector

  • Warner Bros. Discovery (WBD) +15%
  • Paramount Global (PARA) +14%

4. Financial Sector

  • American Express (AXP) +14%
  • Capital One Financial (COF) +13%

5. Materials Sector

  • Albemarle (ALB) +13%

5. Industrial Sector

  • United Rentals (URI) +13%

Top ETFs for the week

The following ETF themes worked well: innovation, clean energy, lithium, battery technologies, cloud computing, autonomous technology, and robotics. The top ETFs for the week include:

  • ARK Innovation ETF (ARKK) 10.7%
  • First Trust NASDAQ Clean Edge Green Energy (QCLN) 9.3%
  • Global X Lithium & Battery Tech ETF (LIT) 8.9%
  • WisdomTree Cloud Computing (WCLD) 8.8%
  • ARK Autonomous Technology & Robotics ETF (ARKQ) 7.5%

A Bullish Pattern Hangs in Balance this Busy Week

* Last week’s rally in the S&P 500 brought the benchmark’s 50- and 200-day moving averages (DMAs) within 15 points or 0.4% of each other. Wall Street has a busy week ahead. The week includes the Fed’s interest rate policy meeting, several earnings reports, and the January jobs report. Investors are eager to see if these events can facilitate a bullish “golden cross” in the S&P 500, with the 50-DMA rising above the 200-DMA.

* The Federal Reserve’s interest rate policy meeting on Tuesday and Wednesday is the most widely anticipated event of the week. Economists surveyed by Dow Jones expect the Fed to raise the benchmark federal funds interest rate by 0.25% to the 4.50-4.75% range at the end of this meeting. Some investors also expect the Fed to signal a pause in interest rate increases during the spring months after the Wall Street Journal raised this possibility last week.

* Another busy week lies ahead on the earnings front. The S&P 500 index heavyweights Alphabet, Amazon, and Apple report earnings this week. The earnings calendar includes reports from many more household names, including ExxonMobil, Facebook-parent Meta Platforms, McDonalds, and Pfizer.

* The Labor Department releases the January jobs report on Friday. Economists surveyed by Dow Jones forecast the U.S. economy to have added 190,000 jobs in January, down from 223,000 in the previous month. They expect the unemployment rate to rise to 3.6% from 3.5%.

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