Dow finishes higher but underperforms, futures point higher

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There were two items in focus late last week from a financial market standpoint, the first being pricing data where Thursday’s CPI (Consumer Price Index) showed a month-on-month (m/m) drop of 0.1% overall with its core (which excludes food and energy) rising by 0.3%, with year-on-year (y/y) readings of 6.5% and 5.7% respectively.

Trade data showed export prices m/m at -2.6% and import prices surprised by rising 0.4%, with their respective y/y readings at 5% and 3.5%. As for consumer inflation expectations out of UoM (University of Michigan), the preliminary readings showed a sizable drop from 4.4% to 4% for the 12-month horizon while a slight increase to 3% for the longer-term 5-year. Its consumer sentiment reading showed a major improvement off the lows, and at levels unseen since April 2022.

And while pricing data dictating central bank policy was no doubt processed by the financial markets, the other item was earnings from financial heavyweights whereby the results showed both JPMorgan Chase and Bank of America besting estimates, Citigroup and Wells Fargo suffering a drop in both earnings and revenue compared to a year ago, the latter largely due to a drop in mortgage originations, but all four piling more money in loan loss reserves and their leadership largely expecting a mild recession.

Key indices finished the week well in the green shifting some shorter-term technical overviews with an outperformance for the tech-heavy Nasdaq 100 (and more so for the Russell 2000), and Treasury yields ended the week lower though not in real terms on the furthest end of the curve, and market pricing (CME’s FedWatch) for a 25 bp (basis point) rate hike out of the US Federal Reserve (Fed) at the start of February with a tinier and insignificant minority venturing into 50bp territory, and thereafter no longer a coin toss on getting into the 5-5.25% range.

In central bank speak we heard the Fed’s Bullard favouring rates above 5% “as soon as possible” given “the front-loading policy has served us well and will continue to serve us well going forward”, Harker after the CPI release seeing 25bp hikes “appropriate going forward” as “the days of us raising them 75 basis points are surely past”.

As for the week ahead, plenty of items out of the US that alone might not be as impacting but in total could add up. We’ve got retail sales for the month of December where m/m expectations are for another drop after its -0.6% November reading and its core to drop 0.7% following a -0.2% print prior. Producer prices will also be on offer that day for the same period and forecasts are for an m/m decrease of 0.1%, and for its y/y to 6.8% from 7.4%.

And while there’s industrial production, a couple of manufacturing indices, and the usual weekly inventory readings out of EIA (Energy Information Administration) and API (American Petroleum Institute) pushed out a day due to today’s holiday, the focus in terms of economic data is expected to tilt a bit towards the tested housing sector with NAHB’s (National Association of Home Builders) housing market index well below 50 and having suffered 12 consecutive worsening readings, the weekly mortgage applications where positive readings have been rare, building permits after its previous reading was at lows unseen since the start of the pandemic, existing home sales falling for ten readings in a row, and housing starts a relative exception as of late managing to best estimates and remain above 2019 readings thus far.

In earnings more financials including Goldman Sachs, but a more diversified offering with Procter & Gamble, a couple of airlines, and the first of the FAANG to report, Netflix, this Thursday. On the fiscal front, the Treasury Secretary notified Congress that the nation’s statutory debt limit will be reached this Thursday.

Dow Technical analysis, overview, strategies, and levels

Positive technical bias is building in both weekly and daily time frames, though with ADX (Average Directional Index) readings for both still in non-trending territory meaning early birds are those anticipating further gains that will push more technical boxes into the green.

The action last week failed to reach its weekly 1st Resistance level keeping both conformist and contrarians at bay, and Thursday's daily conformist sell-after-reversals winning out on the daily time frame as its daily 1st Resistance level held offering more for conformist than contrarians.

IG client* and CoT** sentiment for the Dow

CoT sell bias is dropping, as what was 60% is now 57% (longs +348 lots, shorts -1,027), while retail sell bias has risen further into heavy short territory starting this week at 71% from 67% last Monday.

Dow chart with retail and institutional sentiment

*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am for the outer circle. Inner circle is from the previous trading day.
**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.