As we near the halfway point of 2024, there’s a lot to digest in the financial markets. Jay Woods, Chief Global Strategist at Freedom Capital Markets, provides a look at what traders should be focusing on as we wrap up the first half of the year. From sticky inflation to tech sector rallies, here's what you need to know.
Market overview and highlights
This year has been eventful, with some key highlights grabbing the financial headlines. Inflation has remained stubbornly high, defying expectations of rate cuts. The S&P 500 has reached 31 new all-time highs, earnings growth continues, and artificial intelligence remains a buzzword. Despite these developments, recession fears have been minimal, and a Presidential election is on the horizon.
As we conclude the final week of the first half, critical economic data, particularly the Personal Consumption Expenditures (PCE) numbers, are expected to be released. Additionally, the Russell Reconstitution will take place, making it one of the busiest days of the year for trading.
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Overbought indicators
The Nasdaq 100, driven by a rally in large-cap tech stocks, has reached historically overbought conditions. The Relative Strength Index (RSI) is at its highest level since September 2020, indicating that a pause in the upward momentum and a potential short-term pullback might be on the horizon. The index is significantly above its 50-day and 200-day moving averages, reflecting a robust rally reminiscent of the post-Covid rebound in 2020.
Woods noted on CNBC’s Squawk Box that while the market is in extreme territory, this does not necessarily signal an imminent top, but rather a cooling of momentum following the rebalancing events.
Personal consumption expenditures
The PCE, which is the Federal Reserve’s preferred measure of inflation, is expected to tick down to 2.6% year-over-year when released on Friday. Unlike the Consumer Price Index (CPI) and Producer Price Index (PPI), the PCE covers a broader range of spending and has shown fewer upside surprises, gradually trending lower. A favorable PCE report could be the catalyst the Fed needs to consider a rate cut, potentially setting the stage for a market rally in September.
Russell reconstitution and market volatility
The annual Russell Reconstitution will occur on the fourth Friday of June, reweighting the Russell Indexes to reflect changes in market capitalization. This event causes mutual funds and ETFs tracking these indexes to adjust their portfolios, leading to increased volatility and significant volume spikes. Friday is expected to be one of the busiest trading days of the year due to these adjustments.
Homebuilders
Last week, strong earnings reports from Lennar (LEN) and KB Homes (KBH) highlighted the resilience of the housing market. Mortgage rates dipped below 7% for the first time since March, potentially attracting first-time homebuyers. The ETF tracking the homebuilder sector gained 62% from November to April but has recently cooled. Support at the $100 level is crucial as the sector may gear up for another run in the second half of the year.
Stocks in focus
Although this week is light on earnings, key reports from Carnival (CCL), General Mills (GIS), Nike (NKE), Micron (MU), and FedEx (FDX) will offer insights into various sectors.
Micron Technology Inc (NASDAQ:MU) has had an impressive year, with shares up 84% year-to-date. The semiconductor company has consistently exceeded earnings expectations, though recent price action suggests caution. The stock's performance at support and resistance levels will be critical to watch as it approaches its earnings report.
FedEx Corp (NYSE:FDX, ETR:FDX) has struggled since peaking in March, with the transportation sector lagging behind. However, positive divergences in momentum indicators suggest that the stock might be poised for a rebound. Key levels to watch include the $245 support and the 200-day moving average.
Nike Inc (NYSE:NKE, ETR:NKE) remains one of the Dow’s worst performers, down 12% year-to-date. The stock has a history of post-earnings declines, but recent price action indicates a potential recovery. Investors are looking for a solid earnings report to break above key resistance levels and regain upward momentum.