Short Market Outlook
This week’s market outlook is going to be short and sweet. When faced a massive round of binary events, there is no point going too much into technical analysis as any of these events can change things in the blink of an eye. Also note that February is known to bring nasty corrections with it so a round of failed mega cap earnings could cause a major dent to this recovery rally. The good news is that we just had a 5 week long sell off in early January, so unless earnings disappoint big time, we will be able to avoid a weak February.
SPY just made a new all time high
Let’s shift our focus this week from Dow Jones to the S&P 500—or SPY, in our case.
While Friday’s red close might have made it seem like the markets were stalling, it’s important to note that SPY hit a new all-time high last week. There’s something remarkable about new all-time highs—they often pave the way for even more new highs. The stage is set for what could be a blue skies rally.
However, whether we see this rally materialize will depend on the barrage of factors coming our way next week.
What factors will decide if we get a blue skies rally?
The answer is both simple and complicated.
- FOMC: First, we have the FOMC rate decision on Wednesday. The markets are assigning a 98% probability of no rate cuts, so a pause itself isn’t likely to move the needle much. What really matters is what happens after—the Powell speech and his outlook for future rate cuts. His tone and guidance will be the real market mover. (HINT: The 5 week long sell off was officially triggered by a hawkish Powell in December)
- EARNINGS: Second, there’s a massive round of mega-cap earnings next week. TSLA, META, and MSFT all report earnings on Wednesday after market close. The fate of the markets largely hinges on these three musketeers and how their results shape sentiment. While AAPL earnings are the very next day and are certainly important, expectations are lower for Apple this quarter. Unless they deliver a major disappointment, the market reaction following Wednesday’s earnings is likely to set the tone for the remainder of the week.
- CORE PCE: Oh! And don’t forget there’s that pesky little inflation data point being released on Friday: the Core PCE. If you recall, on weeks where no major earnings or market-moving events are lined up, Core PCE alone is enough to move the markets 1%–2% by itself. So, if you’ve managed to keep your nerves intact by Thursday evening, Core PCE is sure to give you something to think about on Friday.
DIVERGENCE INDICATORS – TNX
TNX (10-year treasury yields) has pulled back slightly, offering a bit of relief heading into next week. While mega-cap earnings, the FOMC decision, and Core PCE will ultimately dictate market direction, a rising TNX would have been a challenging backdrop for such a critical week.
This pullback in yields is a welcome sign, but the markets remain on edge. Let’s see if this reprieve holds as we approach these pivotal events.
DIVERGENCE INDICATORS – $DXY
The $DXY (U.S. Dollar Index), which has been on an impressive tear since 9/30, is now showing a much more pronounced pullback—and that’s definitely good news for the markets.
A softer dollar eases pressure on multinational companies, boosts global liquidity, and generally supports risk assets. Let’s hope this trend continues, as it could provide a helpful tailwind heading into a pivotal week for earnings, FOMC, and Core PCE.
DIVERGENCE INDICATORS – VIX
Another positive sign is the VIX getting crushed to the 14 range, signaling that we’re entering safe territory and the stage is set for a potential rally.
Whether that rally materializes or not is another story, as it will depend on a series of binary events next week, including mega-cap earnings, the FOMC decision, and Core PCE. For now, the backdrop looks supportive—let’s see how things unfold
Trading plan for next week
Markets have almost fully recovered from the failed Santa Rally, and mean reversion setups are becoming increasingly difficult to find. Adding to the challenge is earnings season, which has made it harder to spot clean trade setups since almost every stock in my watchlist has earnings scheduled in the coming weeks.
That said, this slowdown in trading might actually be a good thing. When faced with such a pivotal week, it’s often better to take a step back and avoid overtrading.
However, if we do get blue sky rallies driven by strong mega-cap earnings and Powell refrains from rattling the markets like last time, I’ll need to shift gears. In such a scenario, I’ll likely switch to some trend-following trades, as most setups will involve breakouts rather than mean reversion trades.
For now, patience is key as we navigate this critical week ahead