Daily Brief - Correction coming?

TLDR: Toggle Leading indicators have a wide following - mostly because they tend to be right but also because, produced by AI, they fit the Zeitgeist of the moment. AI is cool. AI can do anything. AI should be able to see through the chaos and anticipate market inflection points.

The underlying message is a little more nuanced. The AI performs price pattern analysis and “health checks” on individual constituents. The insight from these individual checks is that the market is vulnerable to a correction, a re-test of the resistance breakout, rather than a major peak.

Why?

The macro environment remains broadly supportive for the upward trend: the Fed has shown boldness in opting for the larger cut, the economy has slowed but isn’t tanking, and inflation remains in a downward trend. Not exactly goldilocks but bear markets aren’t borne out of mid-cycle slowdowns … if that’s where we are headed.

Market Movers: When the TLI goes bearish

Here are the top 3 and bottom 3 performing US sectors, according to their 1-month returns, based on previous instances when the TLI was bearish:

Top 3 Performing Sectors:

1. S&P Consumer Discretionary: 1.67%
2. S&P Technology: 1.26%
3. S&P Financials: 1.08%

Bottom 3 Performing Sectors:

1. S&P Energy: -0.11%
2. S&P Utilities: -0.02%
3. S&P Telecom: 0.14%

Earnings Spotlight: A slight revenue miss

Costco Wholesale missed market expectations for its fourth-quarter revenue, impacted by cautious consumer spending on higher-priced items and lower gasoline prices.

While demand for groceries and kitchen staples remained strong, sales of furniture, home goods, and sporting items were uneven, reflecting a more selective approach by consumers. Although ecommerce sales continued to grow, the pace slowed slightly compared to the previous quarter.

Same-store sales rose by 5.4%, dampened by lower gasoline prices. Costco’s revenue rose nearly 1% to $79.7 billion, falling short of analyst estimates of $79.97 billion. However, the company exceeded profit expectations, with net income at $5.29 per share, surpassing the forecasted $5.08, driven by a 40 basis-point increase in gross margins.