BigTrends.com Weekly Market Outlook - December 5, 2016

Posted by Price Headley on December 5, 2016 8:58 AM

BigTrends.com Weekly Market Outlook - Another Bullish December or (Delayed) Post-Election Hangover?

And so, the three-week post-election win streak ends. After rallying 6.1% in response to Donald Trump's successful bid for the Presidency of the United States, the weight of that gain just became too much to continue shouldering. The S&P 500 lost just a tad less than 1% of its value last week.

It's far too soon to draw the conclusion that we're headed into a bigger correction. This is, after all, the most bullish month of the year. On the flipside, it wouldn't be wrong to start preparing in case things shift from bad to worse.

We'll weigh it all below, as always. First, let's run down last week's and this week's economic news. We got some biggies that did (and could continue to) move the market in a major way.

Economic Data

It was a busy week to be sure, but there's no disputing the highlight - Friday's jobs report for November.

While the unemployment rate fell from 4.9% to 4.6%, that move may slightly overstate the progress we made on the jobs front - the size of the labor force fell quite a bit, making it easier to come up with a lower unemployment rate. Still, we added 178,000 new payrolls last month, and ADP says we added 216,000 new jobs in November. It's another step forward, even if not quite as big as implied.

Payroll Growth and Unemployment Rate Charts

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Source: Thomson Reuters

The economy took a big step forward on another front too - the second reading on Q3's GDP growth was 3.2%, versus the first estimate of 2.9%. There's still one more revision to go, but it's not likely we'll see any significant (if any) change between now and then. That's the best growth rate we've seen in several quarters.

We also heard about November's auto sales pace on Thursday. They were up 3.7% on a year-over-year basis, and mostly better than expected. Auto sales were also well above the normal rate we've seen this year so far, but note that November is usually a good month for car sales. In fact, November was last year's best month, and the cyclical peak. It's still not clear if the auto industry is growing, contracting, or simply stagnant.

Automobile Sales Charts

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Source: Thomson Reuters

Finally, we saw a huge jump in consumer confidence last month. The Conference Board's reading on consumer sentiment jumped to a multi-year high of 107.1, mostly on the heels of a Donald Trump victory - if nothing else, the public thinks he's going to spur a strong economy. This isn't a small matter. If consumers think their jobs are secure and they're going to see more money in their bank accounts, they'll light a fire under our consumer-driven economic engine.

Consumer Sentiment Charts

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Source: Thomson Reuters

Everything else is on the grid.

Economic Calendar

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Source: Briefing.com

Don't look for quite as much news to process this week, but we're getting a few things to chew on. And, we're getting a couple of really significant reports.

One of them is the ISM Services Index report on Monday, following last week's ISM Manufacturing Index report. The latter was up, and the former is projected to be up too. Better still, both are presently above the critical 50 mark.

ISM Indices Charts

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Source: Thomson Reuters

Tuesday's factory orders could also push the market around a bit. The pros say we're looking for a 2.5% increase in October's orders, reigniting the data after a slow September.

Index Analysis

Let's preface this week's discussion by putting the bigger-picture message out there on the table, front and center, just to set the tone - the market ran out of gas last week, as the Trump rally lost some of its luster. Apparently reality hit that it's going to take some time for him to work whatever economic magic he's going to work, and in the meantime, stocks are uncomfortably overvalued.

Either way, stocks were technically overbought, and that made them vulnerable to even the slightest worry.

The daily chart of the S&P 500 tells the tale about as well as any chart could. We logged three losses over the course of five trading days, the VIX started to piece together a reversal effort, and the MACD lines are just one bearish day away from dishing out a bearish divergence.

S&P 500 Daily Chart

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Chart created with TradeStation

Yet, this isn't a reason to freak out. There IS room for the S&P 500 to peel back without snapping the bigger uptrend. There are several key moving average lines layered between 2177 and 2156 that could act as support, and even below that there's a floor forming around 2117, where the lower Bollinger band and the 200-day moving average line have intercepted one another (though both will be at higher levels by the time the index would have a chance to test either as a floor).

Zooming out to a weekly chart of the S&P 500 we can get a better feel for where we are, and where we might go. It's in this timeframe we can see the market's been in a "two steps forward, one step back" pattern since the beginning of the year. We're in a position where we could find ourselves taking a step back.               

S&P 500 Weekly Chart

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Chart created with TradeStation

The weekly chart of the S&P 500 also provides the weekly chart of the VIX, which - as you can see - is still lingering at an absolute floor. It's testing the waters of a move higher, however, and there's plenty of room for an upward thrust from the VIX. Indeed, it's been a little too long since we've had a big upward jolt from the VIX that really hits the market's "reset" button.

The problem with such an expectation right now (aside from the fact that the S&P 500 has a ton of potential support just below its current level): We're in the midst of one of the most bullish times of the year. Traders may want to be prepared for a small pullback, though not yet a large one.

That's the hint the daily chart of the NASDAQ Composite is dropping anyway. On that chart the NASDAQ has already broken below the 20-day and 50-day moving average lines, and the VXN has broken above its 20-day and 50-day moving averages. We've also got a bearish MACD cross in place here.

NASDAQ Composite Daily Chart

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Chart created with TradeStation

Bearing in mind that the NASDAQ tends to lead the rest of the market, this tilts the balance of the scale to the bearish side of the equation, though not in a big way... certainly not enough to merit a major repositioning of portfolios. Indeed, it wouldn't take much at all to tilt the scales back in a bullish direction, so continue to be ready for anything. Just don't look for any economic news to do the deed - there's nothing that hard-hitting on the economic dance-card for this week. If the tide's going to turn back to a decidedly bullish state, it's going to have to come from corporate events or governmental rhetoric.

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