The Bulls Are in Charge, but 3 Negative Catalysts Loom
Investors must stay vigilant with these macro headwinds coming in.
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Once again, the market rallied on headlines about a possible Iran deal. Even though the Iranians denied a deal, the market held onto the gains and closed near the day’s highs on Thursday. All the major indices, except the DJIA, hit new all-time highs.
Economic Data Helped
It didn’t hurt matters that bonds strengthened and interest rates fell on a barrage of economic reports on Thursday morning. The reports showed inflation is still inching higher, but the news was not quite as bad as expected.
The Fed’s preferred core PCE index for April rose 0.2% month over month, below the 0.3% expected, and 3.3% year over year, in line with forecasts. The headline PCE hit a 3.8% annual rate, a three-year high, driven primarily by oil. But the softer monthly core number was enough to give the bond market a reason to rally, because it suggested the jump in prices the prior month may be starting to ease.
First-quarter GDP was revised down to 1.6% from the initial 2% estimate, a meaningful miss. Consumer spending and investment both got revised lower. Jobless claims came in slightly higher than expected, and the personal saving rate fell to 2.6%, the lowest since June 2022. The combination of softer monthly inflation and weaker growth was enough to push yields lower, which gave equities room to run.
Breadth Held but Did Not Get Euphoric
Market breadth was reasonably good at about 57% positive, but it was not euphoric. The number of new 12-month highs dropped from over 300 names on Wednesday to slightly more than 200 on Thursday, while new lows held around 100. There was some reverse rotation with the Magnificent Seven outperforming the Russell 2000.
Pockets of momentum remained strong with a large number of stocks moving more than 10%. This may have been the best day of big percentage movers in this cycle. I count over 40 names that are up more than 20% today, which is the kind of speculative action that has not been part of any prior session in this run.
3 Catalysts Coming Up
The bulls are large and in charge right now, but you have to wonder what is going to happen when a deal with Iran is actually done. We have rallied dozens of times on questionable news about progress on an agreement, and the market holds on to the gains even when it turns out there still isn’t a deal. We have priced in an agreement to such a great extent that it has created extended technical conditions that are ripe for a sell-the-news response.
The problem with the bearish argument is timing. We have three big events coming into play soon. The first is a deal on Iran. The second is a potential Fed rate hike and increased concerns about inflation. The third is the massive SpaceX IPO. All three are potential negative catalysts, and the more we run up now, the more likely there will be a sharp reversal as these events unfold.
Strategy
I don’t want to sound too negative. There is great momentum and stock picking right now, and I think it’s likely that the speculative interest in secondary stocks will continue, but the macro headwinds are lurking and we have to stay vigilant.
As I’ve stated, I’m playing things tightly and am focused on keeping accounts near highs while trying to catch some of these big moves in individual names. I’ve been burned in market environments like this in the past when I didn’t play strong enough defense.
Have a good evening. I’ll see you tomorrow.
