Stock Market Hits Record Levels: Prepare for What Inflation Can Bring Next

Another packed week for the stock market has come to a close. The broader stock market indexes broke out of their sideways trading range with the S&P 500 ($SPX), Nasdaq Composite ($COMPQ), and Dow Jones Industrial Average ($INDU) closing the week out at record levels.

The US election results and the Federal Reserve’s decision to cut interest rates by 25 basis points are now in the rearview mirror. When Jerome Powell took the podium on Thursday, he made it clear that the Federal Open Market Committee (FOMC) remains focused on their dual mandate of maximum employment and price stability.

Bond Market Action Is Key

The 10-Year US Treasury Yield Index ($TNX) closed at 4.31% on Friday, which is significantly higher than its September low of 3.61%. Bond prices, which move inversely to yields, fell due to possible economic growth and inflation under the new administration.

The weekly chart of the iShares 20+ Year Treasury Bond ETF (TLT) may be flirting with its 50-week simple moving average (SMA), but it’s trending to the downside. For as long as economic growth, inflation, and a widening budget deficit remains in play, bonds are likely to continue trading at low levels.

CHART 1. WEEKLY CHART OF THE ISHARES 20+ YEAR TREASURY BOND ETF (TLT). Bonds have been struggling of late and is likely to remain low for a while.Chart source: StockCharts.com. For educational purposes.

Volatility in stocks and bonds have also declined. Bond volatility measured by the MOVE Index ($MOVE) which is displayed in the lower panel in the above chart, fell significantly this week. This is an important indicator to monitor, as it can give an early signal of a turn in market action.

The Cboe Volatility Index ($VIX) also fell and closed just below 15 for the week. On Wednesday, the VIX fell over 20%, which shows that going into the elections, there was uncertainty among investors. Once the election results were known, the anxiety dissipated, as seen by the action in the VIX.

With an upward trend in stocks and a low VIX, investors are in a sweet spot. There’s no reason to be bearish now unless some unknown event resurfaces, which is always a possibility. If you’re holding long positions, hang on to them, but when there’s a pullback, use it as an opportunity to add more positions. Or maybe you’ve made enough profits, and you want to sell some of your positions. It all depends on your financial objectives and risk tolerance level.

Small-Cap Stocks Getting Saucy

Small-cap stocks have been interesting this week. After breaking out of a sideways trading range, the S&P 600 Small Cap Index ($SML) had a massive upside breakout (see chart below). The long green candle followed by the two small body days could end up being a Rising Three Methods candlestick pattern. The fourth and fifth days need to form before the pattern is confirmed. So save this chart to your ChartLists and see what happens Monday and Tuesday next week. 

CHART 2. DAILY CHART OF THE S&P 600 SMALL CAP INDEX ($SML). After breaking out of a sideways trading range, $SML had a massive upside move. This move could continue depending on how the daily bars play out in the next two trading days.Chart source: StockCharts.com. For educational purposes.

Market breadth continues to favor a bullish move, with 77% of the $SML stocks trading above their 50-day moving average. The Advance-Decline Percent is relatively stable.

Taking a Cue from the US Dollar

There have been some sharp moves in the US dollar. The US Dollar Index ($USD), which tracks the US dollar against a basket of major currencies, spiked on Wednesday, pulled back on Thursday, and resumed its uptrend on Friday (see the chart below). This move is based on anticipating tariffs, which will strengthen the US dollar.

CHART 3. US DOLLAR INDEX ($USD) SPIKES. The rise in the US Dollar Index is in anticipation of tariffs on imported goods. Monitor it closely for early indications of shifts in stock market action.Chart source: StockCharts.com. For educational purposes.

The US dollar is another chart to monitor closely. Like the $MOVE, $USD can give an early indication of shifts in market action.

Next week, we will receive some key inflation data coming out, although they may not impact the market much. The market has probably already priced in inflation expectations.

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End-of-Week Wrap-Up

• S&P 500 up 4.66% for the week, at 5995.54, Dow Jones Industrial Average up 4.61% for the week at 43,988.99; Nasdaq Composite up 5.74% for the week at 19,286.78
• $VIX down 31.72% for the week, closing at 14.94
• Best performing sector for the week: Consumer Discretionary
• Worst performing sector for the week: Consumer Staples
• Top 5 Large Cap SCTR stocks: Applovin Corp. (APP); Summit Therapeutics (SMMT); Redditt Inc. (RDDT); Palantir Technologies (PLTR); Ubiquiti, Inc. (UI)

On the Radar Next Week

• October Consumer Price Index (CPI)
• October Producer Price Index (PPI)
• Powell and other Fed member speeches
• October Retail Sales

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.