Markets Brace for Volatility as CPI and Bank Earnings Hit
Navigating volatility is very difficult, but macro shifts and earnings cycles provide a better environment for positioning.
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JPMorgan Chase (JPM) kicks off fourth-quarter earnings season on Tuesday morning. While the big banks report this week, we have about two weeks before the large-cap technology names start to hit the tape. Between these reports and the Federal Reserve policy decision on Jan. 28, there will be plenty of news flow to generate significant volatility.
Market Sentiment and Bank Reports
The big bank earnings usually provide some insight into the current market mood. The primary question right now is whether expectations are too elevated, which could trigger a "sell the news" reaction. Conversely, we need to see if investors are anxious to add risk and willing to buy names that dip immediately following their reports.
The Shift in Technology and AI
We still have a couple of weeks to wait for the major technology stocks, but the good news is that they aren't seeing massive runups yet. The Magnificent Seven group has been underperforming since its October high and is currently stuck in a trading range just under its 50-day simple moving average. It will be interesting to see if positive expectations start to ramp up as those earnings dates approach. I am particularly interested in Alphabet (GOOGL) , which is the best-acting name in the group and is hitting a new all-time high early Tuesday.
The AI sector has lost its broader momentum, but the silver lining is that it isn't dragging down the entire market. Money is rotating into other areas instead. While select names like Alphabet and certain semiconductor stocks continue to outperform, the phrase "Artificial Intelligence" no longer holds the magic it once did.
Inflation and the Fed Factor
The CPI report arrives at 8.30 am ET on Tuesday. Core inflation is expected to tick up to 2.8% while the headline CPI is anticipated to increase to 2.7%. A soft number might increase the likelihood of a Fed cut at the next meeting, but the current odds of a cut are only 5% so the needle likely won't move much.
The Fed is essentially on hold because inflation remains sticky even as the jobs market slows. There are signs of economic weakness, but inflation is still high enough that the Fed is unlikely to do anything until it has more data.
Small-Caps Take the Lead
The most notable market action currently is the continued relative strength of the Russell 2000. Small-caps are up in six of the last seven sessions and are hitting new all-time highs. We are seeing healthy speculative action in many small names as money rotates out of the Mag 7 and other large-cap safe havens.
As I've noted in my trading insights, intraday volatility is notoriously difficult to trade because the randomness often overrides technical patterns. However, these larger macro shifts and earnings cycles provide a better framework for positioning. There are some good charts developing now that we have moved out of the end-of-the-year period.
We have minor weakness early on Tuesday. Watch closely for the reaction to the CPI report and JPMorgan earnings.
At the time of publication, Rev Shark was long GOOGL.
