The Market Sees the CPI Glass as Half Full, Oracle's Earnings Spur an AI Rally
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Today, February’s CPI report came in higher-than-expected, with the year-over-year headline rate coming in at 3.2% versus the 3.1% consensus expectation. The core CPI, which strips out the volatile food and energy components, came in higher-than expected at a .04% increase for the month, versus the .03% that was expected. And the year-over-year core CPI also came in higher-than-expected at 3.8% versus the 3.7% expectation; but it still was down from last month’s 3.9% reading.
However, if you look underneath the surface, shelter/rent costs are causing a good bulk of the CPI increases, and February’s shelter cost increase was less than January’s. Analysts seem to be confident that shelter prices will continue to gradually decline as we move towards summer. Fingers crossed. That would give the Fed confidence to lower rates at its June meeting.
Despite the higher-than-expected CPI number(s), Fed fund futures are maintaining their expectation of a rate cut at the Fed’s June meeting, with the futures pricing in about a 60% chance that it will occur.
The biggest catalyst for today’s rally was Oracle’s earnings. Oracle (ORCL) reported its 4th quarter earnings yesterday after the close, and the market liked what it heard. The company beat both revenue and earnings expectations, but more importantly (to the market), AI-focused products jump-started its cloud business in a big way. It also stated that it will be making a joint-announcement with AI giant Nvidia (NVDA).
ORCL gapped up and rallied 11.75%, on the news, to an all-time new high. Importantly, it did a good job of holding its gains. But, if ORCL slips below today’s low of the day, it’s probably going to pull back and consolidate for a while. How long-term yields act from here will be key.
Traders bought NVDA on ORCL’s report, and NVDA rallied 7.1%. If NVDA can make a new high it will be bullish for the market, no doubt about it. But if long-term yields continue to rise like they did today, with the 10-year Treasury yield up 51 basis points, it decreases the likelihood of that occurring. It’s possible that we may see NVDA make a new high without the semiconductor ETF (SMH) doing so. I’ll elaborate on that in the near future.
Also helping the market today was Bank of America lifting its S&P 500 2024 profit forecast due to AI having entered “a virtuous cycle.” BofA didn’t have anything particularly new or groundbreaking to say on the subject, and it’s a matter of how much all of the AI-catalyst is priced into the market, and/or has the market gotten ahead of itself?
Today’s rally took the S&P 500 to another all-time new closing high (not a new intraday high), with the mega-cap tech-heavy Nasdaq 100 now lagging the S&P 500.
Today’s rally occurred despite a pretty strong move up in long-term yields, and a rise in the Dollar. Don’t bank on this equity rally continuing if yields and the dollar continue to rise.
Today’s rally in long-term yields explains much of the small-caps underperformance on the day. The Russell 2000 finished down, while the S&P 500 and the tech-heavy Nasdaq were both up over 1%. Today marked the second consecutive day of significant underperformance by the small-caps, and the Russell 2000 is threatening to break down through a rising wedge while also registering a failed-breakout. Disclosure: WMI is short the Russell 2000 ETF IWM.
Breadth was disappointing on the day. While the S&P 500 was up 1.12% and the Nasdaq was up 1.54%, advancing stocks only leading declining stocks by 5 to 4 on the NYSE, and declining stocks outnumbered advancing stocks on the Nasdaq.
It’s a big red flag if breadth continues to deteriorate and the Russell 2000 breaks down in a significant way.
That’s it for now, I’ll write more soon. And as always, I’ll be posting frequent market commentary on WMI’s private Twitter (X) page.
On to a new/updated long & short focus watchlist.
Focus Watchlist
I try to recommend trades that are timely and that a breakout/breakdown is likely to occur soon. If I take a stock or ETF off the focus watchlist, it may be because the trade needs more time to ripen, it ran away from us, or I’m no longer considering it at all.
Longs:
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