Market Insights

Stocks face a confusing mix of positives and negatives, but the biggest story could be an unexpected surge in the Nasdaq-100.

The technology-heavy index rallied 5.8 percent between Friday, March 10, and Friday March 17. In absolute terms, it was the biggest weekly gain since November. But compared with the broader S&P 500’s 1.4 percent bounce, it was the Nasdaq’s best showing in over 20 years (according to TradeStation data).

Two catalysts drove the move. First, the selloff in financials like First Republic Bank (FRC) and Credit Suisse (CS) pushed down interest rates and reduced expectations for Federal Reserve hikes going forward. Second, excitement about artificial intelligence (AI) drew investors back to major technology firms like Microsoft (MSFT), Advanced Micro Devices (AMD) and Nvidia (NVDA).

It’s Dr. Jekyll-and-Mr. Hyde moment. Bears see financial contagion, inflation, and a potential recession. But on the other hand, bulls can argue that the bank meltdown will slow inflation and defang the Fed as a risk to the market. Either way, this week could be pivotal as traders brace for another central bank meeting and watch for evidence of financials stabilizing.

The first headlines Sunday night looked positive with UBS (UBS) agreeing to purchase CS for a fraction of its value. The deal, encouraged by central bankers around the world, was intended to prevent a systemic meltdown like 2008. Therefore traders are likely to watch for signs of stability or further volatility.

The other big event is on Wednesday, when the Fed announces interest rates and guidance on future policy. CME’s Fed Watch shows futures anticipating a single 25-basis point hike this week, with no further increases. That’s a big change from earlier in the month, when markets anticipated about 75 basis points of tightening by the summer.

Banks Crash, Tech Soars

Last week featured sharp differences between major sectors. Banks had another double-digit loss. Those worries about financial contagion in turn hammered economically sensitive groups like energy, materials and industrials. Airlines also slid, partially because United Airlines (UAL) warned about slowing demand.

Technology was the top-performing sector overall as investors continue to focus on AI. OpenAI released GPT-4, supporting images as well as text. Alphabet (GOOGL) released a “magic wand” functionality to automatically write in Google Docs. MSFT followed by adding ChatGPT to Office programs like Word and Excel. Those moves could make AI available to millions of users, potentially boosting the need for faster processors. Semiconductor names like AMD and NVDA surged in response.

Gold miners were the best performing group overall last week, benefiting as safe havens amid the bank meltdowns.

Charting the Market

The S&P 500 briefly turned negative on a year-to-date basis last Monday, but quickly rebounded. There are signs of prices breaking 2022’s downtrend, but without clear signs of a new bullish trend starting.

Traders could now watch to see if the index can make a higher low versus late December. They might also want to know whether it can reclaim the 200-day moving average — a potentially important indicator of long-term trend.

Sentiment is also unusually negative according to the American Association of Individual Investors (AAII). Just 19.2 percent of respondents in its latest poll described themselves as “bullish,” the lowest reading since September. That can be a contrary indicator, showing significant cash on the sidelines.

This uncertainty on the chart could increase the importance of this week’s events. Positive news from the banks and dovish signals from the Fed could make investors more optimistic, while bearish news on either front could trigger further selling.

The Week Ahead

Aside from the Fed meeting on Wednesday, this week brings a handful of potentially important scheduled events.

European Central Bank President Christine Lagarde speaks at 12 p.m. ET today. While normally she wouldn’t impact U.S. markets, the banking crisis may increase the importance of her remarks.

Existing home sales are due tomorrow, followed by Nike (NKE) earnings after the closing bell.

At 2 p.m. on Wednesday, the Fed releases interest rates and projections for future policy. Chairman Jerome Powell will speak 30 minutes later.

Initial jobless claims and new home sales are on Thursday morning.

Friday has few important events.