Stocks Move Lower Amid Rising Inflation Risk

Most of the major U.S. indexes moved lower over the past week as 10-year and 30-year Treasury yields moved to multi-year highs, although small-cap stocks posted slight gains. With the number of Americans on unemployment at lows not seen since 1973, investors are expecting to see an increase in wage inflation over the coming months. Higher wages often lead to higher consumer prices, which translates to higher Treasury yields and potentially slower economic growth as lending rates increase.

International markets were higher over the past week. Japan's Nikkei 225 rose 0.99%, Germany's DAX 30 rose 0.52%; and Britain's FTSE 100 rose 0.78%. In Europe, investors are nervously watching Italy's government as populists are on the verge of forming a new government that could call for a referendum on its Eurozone membership. In Asia, Japan's economy shrank for the first time in nine quarters despite its pro-growth Abenomics policies.

The SPDR S&P 500 ETF (ARCA: SPY) fell 0.73% over the past week. After briefly breaking out from R1 resistance at $272.32, the index moved lower to just above trendline support. Traders should watch for a breakout from R1 resistance to R2 resistance at $280.12 on the upside or a breakdown lower to the 50-day moving average at $267.24 or lower trendline support near the pivot point at $263.49. Looking at technical indicators, the relative strength index (RSI) appears neutral at 57.32, but the moving average convergence divergence (MACD) remains in a bullish uptrend following its crossover earlier this month. (For more, see: Why the Stock Market May Fall 50%: Niles.)

The SPDR Dow Jones Industrial Average ETF (ARCA: DIA) fell 0.95% over the past week. After briefly breaking out from R1 resistance at $248.20, the index moved slightly lower over the course of the week. Traders should watch for a breakout from R1 resistance to R2 resistance at $255.54 on the upside or a breakdown lower to retest the 50-day moving average at $243.33. Looking at technical indicators, the RSI appears neutral at 57.35, but the MACD remains in a bullish uptrend and recently crossed above the zero line.

[Check out Chapter 4 of the Technical Analysis course on the Investopedia Academy to learn more about supplemental technical indicators like the RSI and the MACD]

The Invesco QQQ Trust (NASDAQ: QQQ) fell 1.41% over the past week, making it the worst performing major index. After briefly making new reaction highs at around $171.00, the index turned lower to hit its R1 support at $167.33. Traders should watch for a rebound from these support levels to test trendline resistance at around $170.00 or a breakdown to test the 50-day moving average at around $164.14. Looking at technical indicators, the RSI appears neutral at 55.80, but the MACD could see a near-term bearish crossover.

The iShares Russell 2000 Index ETF (ARCA: IWM) rose 1.16% over the past week, making it the best performing major index. After rebounding from R1 support at $158.74, the index broke out from trendline resistance to make new highs this week. Traders should watch for an extended breakout toward R2 resistance at $164.16 or a move lower to consolidate above new trendline support levels. Looking at technical indicators, the RSI appears lofty at 69.85, but the MACD remains in a strong bullish uptrend. (See also: Small Caps in Russell 2000 Break Out to Fresh Highs.)

The Bottom Line

The major indexes moved lower over the past week with the exception of small-cap stocks in the Russell 2000, which have outperformed large-cap indexes over the past three months. Next week, traders will be closely watching several key economic indicators, including new home sales on May 23, jobless claims and existing home sales on May 24, and Jerome Powell's speaking engagement on May 25. (For additional reading, check out: Behavioral Finance and the 4 Stages of Bull and Bear Markets.)

Note: Charts courtesy of StockCharts.com. As of the time of writing, the author had no holdings in the securities mentioned.