Weekly Market Outlook – Despite Last Week’s Gain, More Red Flags Are Waving

Posted by jbrumley on June 29, 2024 6:32 PM

More often not, how something happened is at least as important as what happened. It’s certainly true of the stock market anyway. Sometimes it’s the subtle, nuanced clues that give you a better hint of what’s really going on.

It’s a concept to consider after last week’s action to be sure. While the major indices basically broke even (the NASDAQ logged a small gain while the S&P 500 suffered a small loss), the bulls’ best chance at extending the rally buckled in a big way when push came to shove.

We’ll show you how and why in a moment. Let’s first run through last week’s biggest economic announcements and then preview what’s coming this week. Generally speaking, last week’s numbers were more positive than not. It remains to be seen, though, if that’s what investors actually want. It could help keep interest rates propped up for a bit longer than most investors were anticipating.

Economic Data Analysis

Lots of real estate data last week… much of it encouraging. That is, home prices continue to rise (at least through April). The Case-Shiller index improved 7.2% year over year, while the FHFA home price index edged up just a bit to also reach a new record level.

Home Price Charts

Source: FHFA, Standard & Poor’s, TradeStation

Just don’t get too excited.

As we suggested last week following the release of May’s sales of existing home, while the prices of homes that are selling are still rising, measurably fewer homes are actually transacting. Sales of newly-built houses tumbled to a multi-month low pace of 619,000 units in May, re-kindling a bigger downtrend. (Most of the houses that are being bought or sold are already built… even more-so than the recent norm.)

New, Existing Home Sales Charts

Source: National Assn. of Realtors, Census Bureau, TradeStation

At least part of this overall home-purchase lull correlates with continued deterioration of consumer sentiment. Although our chart below doesn’t show this month’s data, know that both the Conference Board’s consumer sentiment score as well as the University of Michigan Sentiment index fell a bit from May’s levels. And in the case of the Conference Board’s measure, optimism has been steadily unraveling since 2021’s peak. Meanwhile, the Michigan number may have just restarted a pullback. It’s not a positive for the market. [This data will update at the end of this calendar month -- June -- for July’s look.]

Consumer Sentiment Charts

Source: Conference Board, University of Michigan, TradeStation

Not charted is May’s consumer spending and consumer income reports… data the Fed heavily relies on when making decisions regarding interest rates. Income growth accelerated at a clip even faster than expected, as did spending growth (despite higher prices, and perhaps a little because of higher prices). Also note that the second guess for Q1’s GDP growth rate rolled in at a tepid 1.4% again. Given these numbers, the Federal Reserve doesn’t have to be in a hurry to lower interest rates. [Just note that the Census Bureau’s retail sales data shows a clear stagnation since late last year.]

Everything else is on the grid.

Economic Calendar

Source: Briefing.com

This week won’t be quite as busy, but we are getting one important data set on Friday. Prior to that, however, look for service and manufacturing numbers from the Institute of Supply Management. In both cases it’s been looking as if a rebound is trying to take hold, but also in both cases economists believe we’ll see a slight reversal from May’s direction of movement… although neither will be enough of a change to up-end the bigger-picture turnaround efforts in place at this time.

ISM Services, Manufacturing Index Charts

Source: Institute of Supply Management, TradeStation

Friday’s biggie will be June’s jobs report. You may recall that as of last month we’re still adding new jobs at a respectable pace, but growing layoffs were strong enough to push the unemployment rate up to a multi-year high of 4.0%. Forecasters are looking for a continued slowdown in payroll growth this time around, holding the unemployment rate at 4.0%.... an uncomfortable stagnation given the economic backdrop.

Unemployment Rate, Payroll Growth Charts

Source: Bureau of Labor Statistics, TradeStation

Stock Market Index Analysis

For the previous couple of weeks we’ve expressed concern about a long-term technical ceiling holding stocks back here. As of last week there’s no longer any way we can deny this resistance is a problem.

Take a look at the weekly chart of the NASDAQ Composite below to see the problem in full. The same ceiling that’s stopped and reversed all the index’s breakout efforts going all the way back to late-2022 is doing so again right now… right on cue. For the second week in a row the composite only had to kiss that resistance line to peel well back from those highs. The ease with which that happened should concern any bulls convinced higher highs await.

NASDAQ Composite Weekly Chart, with MACD and Volume

Source: TradeNavigator

Here’s the daily chart of the NASDAQ Composite (with a slightly-different technical ceiling) for a little additional detail. As this version shows us, all of last week’s hard work was unwound right after the index touched a new record high on Friday. Traders couldn’t get rid of stocks quickly enough just a couple hours later. The speed and ease with which the intraday reversal took shape is a red flag.

NASDAQ Composite Daily Chart, with VXN and Volume

Source: TradeNavigator

The weekly chart of the S&P 500 tells the same story. That is, the index only had to bump into its long-term technical ceiling (red, dashed) that connects all the key highs going back to early last year -- on the same day it also reached a record level -- to jump-start the selling.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeNavigator

The weekly chart of the S&P 500 puts this action in the proper perspective. The index isn’t just testing a major technical ceiling. It’s doing so after a 10% runup just since mid-April, and more than a 30% advance from October’s low. That’s a lot of pent-up profit-taking potential... more than we’ve seen since early 2022 (right before a full-blown bear market took hold). The S&P 500 is now 11% above its 200-day moving average line (green) at 4901, which is an unusually high number as well.  

S&P 500 Weekly Chart, with VIX and MACD

Source: TradeNavigator

Still, it’s far too soon to say a correction is clearly taking hold. Although we’re seeing clear hints that the rally effort is running out of steam, the fact is, both of the indices are still well above several technical floors as well. This lull may be nothing more than a short, well-deserved breather. We’re simply seeing some of the clues we sometimes see at the early part of a pullback.