The stock and bond markets were nervous last week as they waited for the latest reading on inflation in Thursday’s CPI report. As was the case before the monthly jobs report on January 6^th the technical outlook was positive ahead of the CPI report.

The encouraging CPI report on Thursday was followed by the start of earning’s season on Friday. Even though JPMorgan Chase (JPM) and Bank of America (BAC) exceeded earning’s estimates Wells Fargo & Co (WFC) and Citigroup ( C) missed but all were higher on Friday.

It was not surprising that the beaten-down small-cap iShares Russell 2000 (IWM) and Nasdaq 100 Index were the strongest last week gaining 5.3% and 4.5% respectively. The other major averages were not far behind as the Dow Jones Transportation Average was up 3.5% while the S&P 500 rose 2.7% and made a one-month high.

The SPDR Gold Shares (GLD) rose 2.9% as they outperformed the Dow Jones Industrial Average which was up 2.0%. The more defensive Dow Jones Utility Average was up 0.8% for the week.

The relative performance chart from the start of the year reflects the positive start as IWM and $TRAN as both are up over 7%, These were well ahead of the $INDU’s gain of 3.5%. Of course, if you look back further, the $INDU has outperformed the $SPX by 5% since October when it was identified as a market leader by the relative performance analysis.

The market internals had gained strength ahead of the CPI (see Tweet) and the weekly numbers did not disappoint. On the NYSE there were 2822 issues advancing and just 499 issues declining. There were 256 new highs for the week with just 28 new lows. The market internals were stronger for the NYSE than the Nasdaq Composite consistent with a more broadly based rally.

The NYSE Composite closed well above the weekly downtrend from the 2022 highs, line a, as well as the October high. The 61.8% Fibonacci resistance at 15,851 was slightly overcome last week with the weekly starc+ band at 16,516. The 20-week EMA is rising and positive at 15,152.

The NYSE All Advance/Decline line moved above its WMA a week ago and is now rising more sharply. It is now ready to test the downtrend, line b, and a strong close above it will indicate that the intermediate trend is now positive. The A/D line has surpassed the October high and shows a new positive trend, line c.

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The focus will be on earnings in the weeks ahead as many have been voicing concerns that earnings estimates have not been lowered enough to reflect the economic conditions. The NY Times article commented that “The analysts who forecast the fortunes of corporate America have rarely been more pessimistic at the start of a year than they are in 2023.”

On a year-to-year basis, Refinitiv data is expecting a 2.2% quarterly decline in S&P 500 earnings while Factset is looking for a 3.9% decline. As a market technician, I do not buy or sell stocks based on earnings reports or estimates. Therefore, it is not surprising that I see the negative outlook for earnings as a positive sentiment reading for the stock market. This was also the case in the spring of 2016 after the stock market completed a technical bottom.

There is plenty of negativity from institutions as indicated by a weekend headline in Bloomberg “JPMorgan, Goldman Say Stocks Recovery Won’t Be Easy in 2023”. The 22 strategists canvassed by Bloomberg “has the S&P 500 ending next year at 4,078.”

That is just 79 points above where we closed on Friday. Historically the small projected yearly gain reminds me of 2017 when the average year-end target was 2368 but the S&P 500 closed at 2673. One high-profile analyst sees the S&P 500 declining as much as 21% in the first three months of the year.

The Spyder Trust (SPY) closed just below the weekly downtrend, line a. The October high and the 50% resistance level at $413.36 is the next barrier on the upside. Once it is overcome the SPY should challenge the 61.8% resistance at $428.85. The 20-week EMA at $390.60 is now good support.

The S&P 500 Advance/Decline line has moved above its downtrend, line b, and the previous high which confirms a new weekly uptrend. On a short-term basis, some of the A-D oscillators have reached overbought levels so a day or two of consolidation would not be surprising.

The action last week confirmed the view that the two-week bounce in the yield on the 10-Year T-Note was just a rebound in a downtrend. The close was just above the support in the 3.400% area, line a. The uptrend and more important support are in the 3.037% area.

The weekly MACDs turned negative at the end of November. The decline below the September lows is a further sign that yields will move lower not higher. The daily MACDs (not shown) are negative and declining with no signs yet of a bottom. The lower yields will be supportive for stocks as the decline in yields makes bonds somewhat less attractive.

In addition to the first full week of earning reports, there are a number of key economic reports in the week ahead. They include Retail Sales, the Producer Price Index, Industrial Production, and the Philadelphia Fed Manufacturing Index.

Some of the more volatile ETFs are overbought with double digit gains and could easily see a 1-2% pullback. In Monday’s trading the dollar and US stock index futures were lower. There are many stocks where the technical studies are positive but prices are still within trading ranges where the risk can be controlled.