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Trading Guide for the week

The Dow Jones Industrial Average saw a notable rise on Friday, driven by significant gains in Home Depot and Caterpillar. Throughout the week, investors shifted their focus beyond the tech sector. See what we are watching for next week!

By Alpaca

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Quick Recap

The financial markets witnessed a remarkable week as the Dow Jones Industrial Average climbed by 247.15 points on Friday, closing at 40,000.90. The surge was fueled by impressive performances from Home Depot and Caterpillar, signaling a shift in investor interest beyond the technology sector. This article delves into the details of the week's market movements and explores the factors driving these changes.

Dow Jones Industrial Average Hits New Heights

The Dow Jones Industrial Average experienced a significant rise on Friday, closing at 40,000.90, a 0.62% increase. During the day, it hit a new record high of 40,257.24, surpassing the 40,000 mark for the first time since late May. Home Depot's shares increased by 1.7%, culminating in a 7.5% rise over the week, while Caterpillar also saw a robust gain of nearly 1.4%.

Performance of Major Indices

The market saw positive movements across major indices:

  • S&P 500: Advanced by 0.55%, closing at 5,615.35.
  • Nasdaq Composite: Rose by 0.63%, ending the day at 18,398.45.
  • Russell 2000 Index: Surged by 6% over the week, with a 1.1% increase on Friday alone.

Tech Sector and Market Shifts

The S&P 500 faced its most challenging day since late April on Thursday due to a pivot away from Big Tech stocks, leading to a 5.6% drop in Nvidia's shares. Despite this, the Dow managed a slight increase of 0.08%, outperforming other indices amidst widespread selling. On Friday, the focus shifted to industrial stocks within the Dow, spurred by optimism about a potential rate cut by the Federal Reserve in September, following a modest reduction in the consumer price index for June.

Home Depot and Caterpillar Lead the Gains

Home Depot and Caterpillar were standout performers:

  • Home Depot: Shares increased by 1.7% on Friday and 7.5% over the week.
  • Caterpillar: Enjoyed a nearly 1.4% gain on Friday, contributing to the Dow's rise.

Impact of Inflation Data

The market's movements were also influenced by recent inflation data. A report indicating a modest reduction in the consumer price index for June suggested a slowdown in inflation, which could prompt a rate cut by the Federal Reserve in September. Despite higher-than-anticipated wholesale inflation data on Friday, the market largely ignored these figures, focusing instead on Thursday's more critical report on consumer prices.

AI Growth and Market Sentiments

David Russell, TradeStation's global head of market strategy, noted that while AI growth has been a dominant theme, other factors like Powell’s recent testimony and the CPI data are influencing different market sectors. This complex interplay between technological advancements and traditional economic indicators continues to offer fertile ground for analyzing investment strategies moving forward.

Small-Cap Stocks and Economic Outlook

The Russell 2000 Index surged by 6% over the week, reflecting investor anticipation of a gentle economic downturn that would benefit smaller firms. Barclays introduced a "new pain trade" involving small-cap stocks and bond proxies, given the current rate environment, while Piper Sandler expressed concerns about a potential market correction.

Bank Sector Performance

Despite lukewarm responses to second-quarter earnings from banks, the overall market sentiment remained positive:

  • JPMorgan: Shares fell by 1.2% despite surpassing revenue forecasts.
  • Citi: Shares dropped by 1.8% despite exceeding expectations on key financial metrics.
  • Wells Fargo: Shares declined by 6% after reporting that its second-quarter net interest income did not meet expectations.

Nvidia's Recovery and Tech Sector Movements

Nvidia's shares recovered by 1.4% on Friday as some investors re-engaged with their preferred tech stocks that had previously sold off. Year-to-date, the S&P 500 has risen nearly 18%, largely driven by a 33% increase in technology stocks. The tech sector has been the primary contributor to this growth, with communication services also up by about one-quarter.

Strong Performances in Other Sectors

Shares of Berkshire Hathaway Class A and Bank of New York Mellon reached new highs following strong second-quarter earnings. Other notable stock movements within the S&P 500 included:

  • Enphase Energy: Led the gains.
  • Corning and Builders FirstSource: Also saw significant increases.
  • Chipotle Mexican Grill and Meta Platforms: Experienced declines.

Market Analysis and Future Outlook

Wells Fargo analyst Christopher Harvey described the week's market activity as more of a rebound than a sustained shift, noting the lack of further improvements in earnings expectations. Meanwhile, Helen of Troy had its toughest week since January 2009, with disappointing first-quarter earnings and lowered forecasts leading to a significant drop in its share value this year.

Play of the Week: $AMZN (Amazon)

Key Levels and Potential Movements

Current Price Action: Amazon (AMZN) recently experienced a significant pullback, closing in the $192.50-$193.50 range. This area could serve as a potential entry point for a long position.

Support Area: Watch for a potential bounce around the $192.50-$193.50 area.

Resistance Breakout: If AMZN moves towards $200, this level has been a significant resistance area and could be a point to consider closing long positions.

For Long Positions: Consider entering around the support zone of $192.50-$193.50, if confirmed by price action.

Monitor Breakout: Wait for a clear move towards $200 for a potential exit point for long positions.

Risk Management: If AMZN fails to hold above $192.50-$193.50, consider re-evaluating for potential downside risk.

Short Positions: Once the target of $200 is reached, look for potential short opportunities given the resistance at this level.

Before making any investment decisions, conducting thorough research and considering consulting with a financial advisor is crucial. This analysis is based on previous price action, which does not indicate future price action.

Key Economic Data Releases

Tuesday, July 16:

  • Business Inventories: An important measure of economic activity and potential issues in the supply chain.
  • Export Prices & Import Prices: Indicators of inflationary pressures due to international trade.
  • NAHB Housing Market Index: Offers insights into the state of the housing market.
  • Retail Sales: A significant indicator of consumer spending and overall economic vitality.

Wednesday, July 17:

  • Building Permits: Signals upcoming construction projects.
  • Capacity Utilization: Indicates the efficiency of economic operations.
  • EIA Crude Oil Inventories: Influences oil pricing and energy market trends.
  • Industrial Production: Tracks output from industrial sectors like factories and mines.
  • MBA Mortgage Applications Index: A predictor of housing market trends.

Thursday, July 18:

  • Continuing Claims: Offers continuous insights into the job market.
  • Initial Claims: A weekly snapshot of new unemployment filings.
  • Leading Indicators: A composite index predicting future economic directions.

Earnings Reports to Watch

It is an important week regarding earnings with much of the financial sector reporting, along with major companies like United Airlines and Johnson & Johnson. It is crucial to pay attention to these earnings reports for potential opportunities, but also for potential marketwide impact upward or downward.

Monday, July 15:

  • Goldman Sachs Group (GS), BlackRock Inc. (BLK)

Tuesday, July 16:

  • UnitedHealth Group Inc. (UNH), Bank of America Corp. (BAC), Morgan Stanley (MS), PNC Financial Services Group (PNC), State Street Corp. (STT), Interactive Brokers Inc. (IBKR), JB Hunt Transportation Services Inc. (JBHT)

Wednesday, July 17:

  • ASML Holdings NV (ASML), Johnson & Johnson (JNJ), Elevance Health Inc. (ELV), Prologis Inc. (PLD), US Bancorp (USB), Crown Castle Inc. (CCI), Discover Financial Services (DFS), Equifax Inc. (EFX), Steel Dynamics (STLD), United Airlines Holdings Inc. (UAL), Alcoa Corp. (AA)

Thursday, July 18:

  • Novartis AG (NVS), Abbott Laboratories (ABT), Cintas Corp. (CTAS), DR Horton Inc. (DHI), Domino's Pizza Inc. (DPZ), Netflix Inc. (NFLX), PPG Industries Inc. (PPG), Taiwan Semiconductors Manufacturing (TSM), Intuitive Surgical Inc. (ISRG), Blackstone Inc. (BX)

Friday, July 19:

  • American Express Co. (AXP), Schlumberger NV (SLB), Travelers Companies Inc. (TRV), Halliburton Co. (HAL), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Comerica Inc. (CMA)

Economic Data, Rates & the Fed

This week's pivotal economic reports included the Consumer Price Index (CPI) and the Producer Price Index (PPI).

Consumer Price Index (CPI):

  • Headline CPI: Dropped by 0.1% month-over-month (MoM), below the anticipated +0.1%, bringing the annual rate to 3%, a decrease from last month's 3.3%. This marks the first decline since May 2020, reaching a three-year low.
  • Core CPI: Excluding food and energy, rose by 0.1% MoM and 3.3% year-over-year (YoY), both figures falling short of the expected +0.2% and +3.4%.

Producer Price Index (PPI):

  • Headline PPI: Increased by 0.2% MoM, surpassing the expected 0.1%, with the annual rate at 2.6%, above the forecasted 2.3%.
  • Core PPI: Excluding food and energy, it rose by 0.4% MoM and 3% YoY, exceeding predictions of 0.1% and 2.5%.

University of Michigan Consumer Sentiment:

  • Fell to a low of 66 over eight months, down from 68.2 in June and below the expected 68.5. Inflation expectations for the short-term (one year ahead) and long-term (five years ahead) slightly decreased to 2.9%.

Initial Jobless Claims:

  • Reported at 222,000, significantly below the anticipated 236,000, marking the lowest level since late May.

Atlanta Fed’s GDP Now Forecast for Q2:

  • Updated to show a rise to 2.0%, up from the previous estimate of 1.5%.

Conclusion

The past week has been a dynamic period for the stock market, marked by strong performances in the Dow, significant shifts in investor interest, and varying fortunes across different sectors. As the market continues to respond to inflation data, Federal Reserve policies, and technological advancements, investors will need to stay informed and adaptable to navigate the ever-changing financial landscape. Stay informed weekly with Trade Easier! Subscribe to our newsletter to stay informed on the latest financial trends and insights. Additionally, join our community here!