Weekly Market Outlook - Close, But No Cigar

Posted by jbrumley on April 22, 2017 2:09 PM

042317-trendscoreCongratulations to the bulls. A week ago today, the market was on the precipice of a pretty significant meltdown. Thanks to last week's strength, stocks are at least out of immediate danger.

On the other hand, the indices have yet to clear the one hurdle they need to clear to make a reasonably convincing bullish case. Namely, the S&P 500 failed to fight its way back above the 50-day moving average line despite a couple of respectable attempts late in the week. Such a breakout is still within reach, but until that line is cleared, we can assume nothing.

We'll look at the upside and downside below. First, let's slice and dice last week's and this week's economic announcements.

Economic Data

Last week was actually a pretty big week, economic news-wise. It was an especially important week for real estate... and the news was good.

The party started with last month's housing starts and building permits, reported on Tuesday. Starts fell, and fell short of expectations. Permits, however, rolled in higher and higher than expected. Either way, the bigger trend on both fronts remains a positive one.

Housing Starts and Building Permits Charts
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Source: Thomson Reuters

As strong as the starts and permits data has been, builders still aren't busy enough to meet demand for new home purchases. Last month's existing-home purchases reached a ten-year high pace of 5.71 million units. They may have been even stronger too, had more inventory been available. The flipside of that is, limited inventory is keeping house prices up.

Existing Home and New Home Sales, Inventory Charts
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Source: Thomson Reuters

The new home sales data and inventory for last month is going to be reported this week. See below. Economists don't expect a big change there from February's pace, but they weren't looking for a big jump in existing home sales either.

The week wasn't all about real estate, however. We also heard last month's capacity utilization and industrial productivity. It could have been better, although it could have been worse too. Regardless, we really need to see more progress from this data, as it coincides very well with the market's long-term earnings growth trend.

Capacity Utilization and Industrial Productivity Charts
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Source: Thomson Reuters

Everything else is on the grid.

Economic Calendar
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Source: Briefing.com

Speaking of real estate, note that February's FHFA Housing Price Index and the Case-Shiller Home Price Index will be updated on Tuesday. As was noted, home prices remain in an impressive uptrend. Economists don't expect that to have changed this time around.

Case-Shiller and FHFA Home Price Indices Charts
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Source: Thomson Reuters

Also this week we'll hear the final reading for April's Michigan Sentiment Index, and the first and only reading on the Conference Board's consumer confidence measure. Both continue to move higher (even if not in a straight line). Consumers -- spenders -- are doing all they can to keep the economy moving forward. The pros don't see any progress on these charts of April, but the comparative bar is set pretty high as is.

Consumer Confidence and Michigan Sentiment Charts
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Source: Thomson Reuters

The proverbial big Kahuna for the week, however, has to be the first reason on Q1's GDP growth rate. Economists are looking for the pace to grow from Q4's final growth rate of 2.1% to 1.1%. If the initial reading isn't a significant beat of expectations, that could be seen as a letdown. A growth rate of 1.1% isn't much.

GDP Growth Chart
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Source: Thomson Reuters

Index Analysis

It was a good try, but when all was said and done, the market didn't clear a key hurdle it needed to clear. Namely, the S&P 500 wasn't able to move above its 50-day moving average line (purple). In fact, it also ended up closing below its 20-day moving average line (blue) for the week thanks to Friday's pullback.

S&P 500 Daily Chart
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Chart created with TradeNavigator

Maybe it was just a pre-weekend cleanout. Or, maybe it wasn't. Whatever the case, the S&P 500 itself remains trapped between a rock and a hard place, forcing us to look at other charts for some sort of clue as to the market's current undertow. We're opting for the daily chart of the NASDAQ Composite simply because it's showing us something else of extreme interest.

Take a look. Thanks to last week's outsized strength from the NASDAQ's stocks, the composite was able to move within sight/reach of a key horizontal ceiling at 5929 (orange, dashed). Thursday was the third time since early March that resistance has been tested, and fifth day it happened for the same timeframe. It's also noteworthy that the NASDAQ's upper Bollinger band is right around that level, and has served as a ceiling itself several times in recent weeks.

NASDAQ Composite Daily Chart
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Chart created with TradeNavigator

In many ways this leaves us in the same predicament the daily chart of the S&P 500 does -- on the fence. The only difference between the NASDAQ and the S&P 500 is, the S&P 500 is on the defensive, and the NASDAQ is on the offensive.

Zooming out to a weekly chart of the S&P 500 doesn't actually help us much, though it is interesting. It's in this timeframe we can (still) see why the market is having such a tough time here. The rally since early November has been unusually prolonged, and traveled an unusually large distance. It's also in this timeframe we can see the index has logged a string of lower highs.

S&P 500 Weekly Chart
042317-sp500-weekly
Chart created with TradeNavigator

This is very much a "wait and see" situation. Specifically, we're waiting to see if the NASDAQ Composite breaks past its ceiling at 5929, and waiting to see if the S&P 500 breaks under its floor at 2329. The former is bullish for the broad market, and the latter is bearish.

Should we get a breakdown, we still contend the most likely downside target is the S&P 500's 200-day moving average line (green) currently at 2233. There's no meaningful upside target, as we're into uncharted waters. It's unlikely any breakout thrust would get very far, however, taking into consideration the broad market's frothy valuation and the fact that we've gone far too far without a major corrective move.

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