Weekly Focus: Investors Abandon Stocks

The S&P 500 index futures have been trading mostly neutral this week, adding 0.1% to 5028 points, while the benchmark reached a new all-time high on Friday at 5030 points. The index has been climbing for a fifth consecutive week, with a 7% gain during this period. Caution is advised as large investors are reported to be abandoning the stock market, with the SPDR S&P 500 ETF Trust (SPY) experiencing $12.1 billion in capital outflows last week. This is the second-largest outflow since the week of February 24 through March 3, 2020, which saw a $21.0 billion outflow during a market decline.

Despite over 70% of S&P 500 listed companies delivering Q4 2023 earnings reports, with more than 83% beating forecasts, the market appears fragile, and the index is considered too overbought. The upcoming January inflation data in the United States, set to be released on Tuesday, could provide new momentum for stocks. Expectations are for a slowdown in inflation, with CPI projected to slow down to 2.9% YoY from 3.3%, and core CPI expected at 3.8% YoY, down from 3.9%. Other economic indicators, such as retail sales and producer price index, are also expected to signal slowing down inflation.

If these expectations align with reality, investors may increase their bets on interest rate cuts by the Federal Reserve (Fed) in March and May. On Friday, bets improved slightly to 17.5% from 16.0% for March and to 54.5% from 52.2% for May.

Inflation is the last major hurdle on the upside path for the stock indexes. If inflation continues to slow down the crowd will indeed drop any doubts about upside perspective of stocks. This is the likely moment when the index may swing into correction or even make a U-turn.

The S&P 500 has surpassed the final upside target zone at 4850-4950 points, hinting at a potential correction. This correction period may last up to the middle of the next week. Therefore, betting on a rally before that could be risky. Reversal patterns are anticipated, with the first already emerging, signaling a standard correction of 5-7% within the next six weeks. The starting point of this correction is yet to be defined.

Oil prices have settled after hitting the resistance at $82.00-84.00 per barrel for Brent crude benchmark, following Israeli Prime Minister Benjamin Netanyahu's rejection of a ceasefire proposal. Joe Biden has grown frustrated with Benjamin Netanyahu over his military campaign in Gaza. The ongoing war in the Middle East increases the likelihood of further upside moves in oil prices above $84.00 per barrel in February and March.

Gold prices, having reached mid-term upside targets at $2000-2100 per troy ounce, are currently testing the support at $2010-2030 per ounce. Rising Treasuries yields are weighing on prices, potentially leading them to $1920 if the support at $2010 per ounce is breached.

Tensions in the currency market are mounting, with expectations of another wave of the upcoming downside correction for the Dollar being diluted by strong economic data. If U.S. inflation proves to slow down further these expectations may change dramatically. However, it remains risky to bet on both the rising and declining EURUSD. A return to the 1.11500-1.12500 area for the pair is likely, but a drop to 1.05000 should not be excluded.