A Hot PPI Inflation Report Spurs a Failed Breakout in the Russell 2000, and Some Weakening Nasdaq Breadth Red Flags
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This morning saw the release of February’s PPI report (wholesale inflation). The month-over-month number came in at 0.6%, much more than the consensus 0.3% that was expected. The core PPI, which subtracts volatile food and energy prices, also came in higher than expected at 0.3% versus the 0.02% expectation.
The increase in cost pressures at the wholesale level further complicates the Fed’s potential rate-cutting decision process, as it come after higher-than-expected inflation data last month, and a higher-than-expected CPI report this Tuesday. As I wrote last month, and again this Tuesday, the market can probably shrug off one month of hot CPI & PPI inflation data, but not two months.
Not to put the cart before the horse, but if we see stubbornly high inflation data again next month, things will probably get pretty messy.
Treasury yields rallied on the short and long-end after this morning’s PPI report, with the yield on the 10-year Treasury jumping sharply and putting pressure on equities. If the 10-year yield breaks out and closes over February’s high, it opens the door to a materially larger pullback in the indexes, particularly in the small-caps.
Strength in the mega-cap tech stocks masked what was a broad pullback in equities, with solid to good gains in Microsoft, Google, Amazon and Apple belying the jump in long-term yields and propping up the major indexes. At some point, however, the mega-cap tech stocks will succumb to a continued rise in long-term yields, although they will likely still hold up better than the “average” stock.
A late-day rally helped keep the S&P 500’s and Nasdaq 100’s losses to just 0.3%. But don’t count on that happening again if we get another jump in yields and the dollar. Today’s low now becomes important short-term support to watch.
Market breadth was poor, today, with declining stocks outnumbering advancing stocks on the Nasdaq by 3 to 1, and nearly 4 to 1 on the NYSE. And we’re starting to see some weakening breadth-related red flags on the Nasdaq.
Since late-December, we’ve been seeing a negative divergence involving the percentage of Nasdaq stocks over their 50 dma. If we get another day or two of poor breadth like today’s, we’ll see that percentage decline materially below its early-February low.
The Intermediate Breadth Momentum Oscillator is essentially a “barometer” of breadth. The Nasdaq's ITBM has started to signal a sell, suggesting that today's action is not just a near-term affair.
The Nasdaq’s Intermediate-Term Volume Momentum Oscillator is doing the same.
As it almost always does, poor breadth hit the small-caps the hardest, with the Russell 2000 Index down 1.8% — although it was down 2.7% before a late-day rally salvaged it a bit. Today’s low on the Russell 2000 (IWM) now becomes important short-term support. The Russell 2000 has now broken down through a rising wedge and has put in a failed breakout. While the late-day market rally helped to give today's candlestick a bottom-side wick, the overall technical picture and today's poor breadth indicates sizeable risk.
Back to the PPI report and inflation, also muddying the inflation picture and the Fed’s job are a spike in copper prices and rise in crude oil. Copper, a key component in autos, electrical equipment and various industrial processes, spiked and broke out on Wednesday.
Crude has broken out of an inverse head & shoulders formation, and looks to have some room to potentially run before it hits resistance in the high 80s.
That’s it for now, I’ll elaborate more over the weekend. As always, I’ll be posting frequent market commentary on WMI’s private Twitter (X) page.
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