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Stock Market Update Thursday January 16, 2025

Stock Market Update Thursday January 16, 2025 Equity markets paused today following yesterday’s sharp rally. The S&P 500 (SPX) edged lower by 0.2%, while the Nasdaq 100 (QQQ) posted a more pronounced decline of 0.9%. In contrast, the Russell 2000 (IWM) managed a modest gain of 0.2%, supported by continued easing in Treasury yields.


On the earnings front, Taiwan Semiconductor (TSM) gained 4% after reporting results, staying within its implied 6% move. However, the upbeat results from TSM were insufficient to lift broader semiconductor names. NVIDIA (NVDA) closed 2% lower, surrendering a significant portion of its prior-day gains. NVDA is now flat year-to-date and trading approximately $20 below its early January intraday highs.


Away From Stocks: In the commodities space, crude oil experienced a minor pullback but remains a focal point for investors, having rallied approximately $10 per barrel over the past month.  The benchmark 10-year Treasury yield declined slightly to 4.62%, extending its downward trajectory. Meanwhile, the iShares 20+ Year Treasury Bond ETF (TLT) advanced for a third consecutive session, now trading above $87, marking a recovery from Monday’s intraday low of $85.


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Inflation Data and Market Reactions Post-CPI

As those closely monitoring inflation and our research on the data of macroeconomic trends are aware, shelter costs have been a significant driver of core inflation, remaining above the Federal Reserve’s 2% target. Notably, approximately 53% of the components in inflation metrics such as the Consumer Price Index (CPI) have returned to or fallen below their pre-pandemic levels.


However, the persistently elevated CPI shelter component is a result of its lag in capturing real-time price changes. Encouragingly, December’s shelter prices posted the smallest year-over-year gain since January 2022, suggesting that this lagging indicator may finally be cooling.


Market Movements Following the CPI Release

The markets responded positively to the CPI report, with notable movements across several asset classes. Treasury yields rolled over immediately, signaling reduced pressure on interest rates, while the U.S. dollar weakened, breaking lower after a sustained period of strength. Equities rallied broadly, with breadth improving significantly—advancing stocks outpaced decliners by roughly six to one, a robust indicator of market participation. While the CPI report did not materially alter the broader narrative, the core inflation reading came in slightly below expectations, reinforcing the perception of a moderating inflationary environment.


Multiple sectors recorded strong performances, particularly financials, which had been in a downward trend over the past month. The XLF ETF breakout yesterday and a buy signal from our proprietary algorithm is an encouraging sign of improving sentiment.


Although there have been positive developments, there are still some structural issues. While market breadth is improving, it is still relatively low. For this rally to continue, we need more broad participation and strong confidence that interest rates will decline. A single day's performance, even if it's promising, is not enough to indicate a change in trend. To see sustained growth, we need to confirm that interest rates will decrease over the medium term, not just see a temporary dip. Additionally, we require a buy signal from our proprietary algorithm for the SPY ETF and QQQ ETF.


Outlook and Federal Reserve Implications

Market expectations for the Federal Reserve are relatively stable. After the CPI report, the likelihood of rate cuts in 2025 increased slightly from 30 basis points to 40 basis points. However, this small change indicates that the Fed's overall policy direction is not shifting at this time.


Next week, the release of the Personal Consumption Expenditures (PCE) data is anticipated, and the inflation outlook seems largely steady, with minimal chances for major surprises. Both the Producer Price Index (PPI) and the CPI have fallen short of expectations, supporting the idea of a slowing inflation trend.


Final Thoughts: Patience Amid Improving Conditions

While yesterday rally was encouraging, it’s important to exercise patience. Weekly momentum indicators remain negative, and the broader market trend has yet to decisively turn higher. A pullback or consolidation in the coming weeks would not be surprising, but such a move could present a compelling buying opportunity.


Bottom Line:


Yesterday's market activity demonstrated solid initial progress, and today the S&P 500 Equal Weight ETF (RSP) triggered a buy signal from our proprietary algorithm. Sustaining this upward momentum will depend on further evidence of declining Treasury yields, broader market participation, and improving trends within key sectors. Additionally, confirmation from our proprietary algorithm's buy signals across multiple indices will be critical to validate the current recovery.


Despite uncertainties, the macroeconomic environment shows positive signs: a supportive Fed, improving manufacturing data, and easing inflation. As earnings season progresses and more economic data is released, markets may stabilize, leading to renewed optimism. Stay tuned for the crucial CPI report this Wednesday. The S&P 500 SPY ETF closed below the important support level of $586.12. On Friday, January 10th, 2025, our proprietary algorithm issued a sell alert. We will await a buy alert before adding to our existing stock positions or initiating new ones. In light of the sell signals identified by our proprietary algorithm for the SPX500 December 31, 2024, RSP ETF December 11, 2024, Nasdaq100 January 2, 2025, QQQ ETF January 2, 2025, IWM ETF December 13, 2025, and DIA ETF December 13, 2025, we advise against deploying dip-buying strategies or attempting to bottom-fish the market. A more prudent approach would involve prioritizing strategic positioning in anticipation of the market's next buy alert from our proprietary algorithm, rather than engaging in speculative efforts to predict a bottom. This disciplined stance minimizes exposure to potential downside risk while preserving capital for more opportune entry points.


Cycle Pivot:


We expect the next market shift to occur between January 6-10, 2025, which could lead to a sell-off. However, we will wait for confirmation from our proprietary algorithms before issuing a sell signal. We do not attempt to predict exact market highs or lows. Instead, our strategy focuses on preparing for the next market direction based on strong, data-driven signals rather than guesses. The next minor cycle pivot will occur on January 27, 2025, details about the subsequent major cycle will be announced nearer to the pivot date.















© 2024 by Algorithm Trading Alerts LLC

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