Market Insights

Stocks could be attempting a breakout as confidence continues to spread.

The S&P 500, Nasdaq-100 and Dow Jones Industrial Average climbed fractionally between Friday, December 1, and Friday, December 8. All three had their highest daily and weekly closes in over a year. Cboe’s Volatility Index (VIX) also hit its lowest level in almost four years, a potential sign of spreading optimism.

“Improvements in the expected trajectory of inflation … [ boosted ] sentiment across age, income, education, geography, and political identification,” University of Michigan economist Joanne Hsu said in the December consumer sentiment report. Expectations about business conditions and politics also got better.

Job growth remained healthy and unemployment fell more than expected. However fewer openings and more layoffs suggested the labor market has cooled from its breakneck pace.

The final revision of third quarter productivity and labor costs were another bright spot. Productivity growth was upgraded to 5.2 percent, up from 4.7 percent (and the original 4.2 percent estimate). Unit labor costs were revised down to -1.2 percent from -0.8 percent (and the original forecast for a positive 0.8 percent reading).

Those headlines, along with the lowest gasoline prices of the year, spurred hopes that inflation is easing and conditions are finally returning to pre-pandemic norms. Lower interest rates could be the result.

AI Surge

Last week also had big Artificial Intelligence (AI) news from Advanced Micro Devices (AMD) and Alphabet (GOOGL).

AMD rallied more than 6 percent after announcing that Microsoft (MSFT), Meta Platforms (META) and Oracle (ORCL) will use its new Instinct MI300X chip. That suggested it’s making headway in a market dominated by Nvidia (NVDA).

GOOGL released its Gemini AI model, which can understand videos and images in addition to text. It spurred optimism the company will regain lost ground to MSFT and ChatGPT.

Cruise-ship operators Carnival (CCL) and Norwegian Cruise Line (NCLH) were the top performers last week. While they didn’t have any obvious news, they stand to benefit from lower interest rates and cheaper fuel.

Walgreen Boots (WBA) jumped after rival CVS Health (CVS) issued strong guidance. WBA has lost more than one-third of its value in 2023 and is the worst-performing member of the Dow Jones Industrial Average. The stock could also benefit from lower interest rates given its heavy debt load.

Alaska Air (ALK) led to the downside after announcing plans to acquire Hawaiian Airlines (HA).

Old Dominion Freight Line (ODFL) and Charter Communications (CHTR) also dropped on signs of weak business. ODFL said daily revenue fell almost 1 percent last month, while CHTR indicated it was losing broadband subscribers.

Homebuilders Break Out

Homebuilders rallied last week as interest rates fell. The Philadelphia Housing Index jumped almost 4 percent to a new all-time high. That places them ahead of other major groups like semiconductors and technology, which are still below their 2021 peaks. Does that reflect confidence in interest rates easing, given their reliance on mortgage financing?

Airlines also surged. They got a boost from ALK’s takeover of HA, along with lower fuel prices. JetBlue (JBLU) additionally noted better-than-expected bookings, a sign of healthy travel demand.

Banks continued to outperform as bond yields eased.

Energy remained a weak spot in the market as crude oil hit a five-month low. Precious metals and Chinese stocks also fell.

Charting the Market

The S&P 500 was slightly negative for most of last week. However it clawed into positive territory in the last session and ended 0.2 percent above its close the previous Friday. The index has risen for six consecutive weeks, its longest winning streak since late 2019.

Still, overall movement has narrowed as prices push against their July peak. A move above that resistance could make traders expect further upside. They may look for potential support around the previous week’s low of 4537.

This chart includes the Rate of Change indicator with a nine-day interval. Notice how surges above recent highs are sometimes followed by continued gains.

Faster moving moving averages are now above the slower MAs. That may suggest the trend has turned bullish again.

The Week Ahead

This week brings two major economic events: the last inflation reading of the year tomorrow morning and the last Federal Reserve meeting on Wednesday afternoon.

The only noteworthy item today is ORCL’s earnings after the closing bell.

The consumer price index (CPI) inflation report is at 8:30 a.m. ET tomorrow. A low reading in November propelled stocks through a bearish trendline.

The producer price index (PPI) is on Wednesday morning, along with crude-oil inventories. The Fed releases its monetary policy and projections at 2 p.m. ET. Investors will likely focus on the “dot plot” to see whether rate cuts are expected in 2024. Chairman Jerome Powell will begin a press conference around 2:30 p.m. Adobe (ADBE) announces results after the closing bell.

Thursday brings retail sales and initial jobless claims. Costco (COST) and Lennar (LEN) report earnings in the afternoon.

Industrial production is on Friday morning.