Weekly Market Outlook – Is It Too Good to Be True (or Too Bullish to Last)?
Already well up from their late-March low, stocks just logged their best week in a little over a year. The S&P 500 advanced 4.7% over the course of the past five trading days, in fact, is now up 12.8% for the past three weeks. Yes, that’s the best three-week stretch in a long, long time as well, pushing the market to a record high as result. Headlines regarding the conflict in the Middle East of course were the big prompt for the move.
The question is, can it last? Maybe. The fact is, however, this rally is so unusual that’s it’s difficult to say, and even more difficult to trust. Whatever’s in the cards, it’s not difficult to expect some sort of corrective move sooner or later simply to cool of this overheated market. It’s what happens after that move that will tell us what traders are truly thinking here.
Giving credit where it’s due though, the bulls certainly set themselves up for success. All the major indexes are back above major technical support levels. Even with a decent-sized pullback they could hold above these lines. The trick will largely be justifying valuations; the S&P 500’s forward-looking P/E ratio now stands at a frothy 22.
We’ll look at the action in detail below. Let’s first review last week’s big economic announcements.
Economic Data Analysis
While we’re still waiting for the Census Bureau’s latest new home sales data (no update since January), the National Association of Realtors is still delivering its reports. And they remain mostly disappointing. Sales of existing homes slipped just a bit in March, but fell to a multi-month low annualized pace of 3.98 million units.
New, Existing Home Sales Charts
Source: National Assn. of Realtors, Census Bureau, TradeStation
The NAR says inventory remains limited, but this weakness seems much bigger than that headwind.
The missing new home sales numbers are scheduled for release in early May, by the way.
We also rounded out the prior week’s consumer inflation figures last week with March’s producer inflation report. As expected thanks to soaring gas prices, it’s up. But, with or without gas factored in, producers’ costs are up more than expected, inching to multi-month highs.
Consumer, Producer Inflation Rate Charts
Source: Bureau of Labor Statistics, TradeStation
As things stand right now, it’s just gotten a whole lot tougher for the Federal Reserve to justify an interest rate cut anytime soon, even if the economy needs a kick in the pants…
… which it does. That’s what the Fed’s industrial output and capacity-utilization data suggests anyway. Both slipped last month. It wasn’t a major setback -- certainly not enough to break their recent shallow uptrends. All big trends start out as small ones though. We’ll see.
Industrial Production, Capacity Utilization Charts
Source: Federal Reserve, TradeStation
Everything else is on the grid.
Economic Data Report Calendar
Source: Briefing.com, TradeStation
Not a whole lot in the lineup this week. We’ll hear last month’s retail sales report on Tuesday. They should be up from February’s tepid growth pace, although some of this increase will certainly be attributable to higher prices. Even so, consumers continue doing their part to directly support the economy.
Retail Sales Charts
Source: Census Bureau, TradeStation
The only other item of interest this week will be the third and final update of the University of Michigan’s sentiment score for April, on Friday. Forecasters believe this final print will be a multiyear low, largely reflecting concern over the conflict in the Middle East.
Consumer Sentiment Charts
Source: University of Michigan, Conference Board, TradeStation
The Conference Board’s measure of consumer sentiment for April should be posted sometime following the week ahead.
Stock Market Index Analysis
We’re going to start this week’s analysis with a look at the weekly chart of the S&P 500 just to put last week’s -- and the past three weeks’ -- gains in perspective. It’s wild. With the 4.7% advance last week, the index is now up nearly 13% since the late-March low, and well past the previous record high near 7,000. It’s not completely unheard of, particularly after sizeable pullbacks like the one we saw in February and March. Such moves tend to take shape during and right at the end of bear markets though. That’s not quite what we’re seeing this time around.
S&P 500 Weekly Chart, with MACD and VIX
Source: TradeNavigator
That doesn’t mean the market can’t or won’t continue building on this bullish effort. Just consider the circumstances. Nothing’s fundamentally changed other than the potential wind-down of the war in Iran. But, that could still easily crumble, and even if it does cool off, why are traders willing to price stocks at this new level when they weren’t willing to do so just a few weeks ago?
Whatever the case, in the very immediate near-term there’s reason to worry about a technical correction simply because things are so overbought. Take a look at the daily chart below. There are now three bullish gaps since April 8th. Not every gap gets filled in. Investors are going to be hesitant to let three gaps made this close together go unfilled though. Never even mind the outrageous distance covered in just 13 trading days that’s sure to have at least some people thinking about taking profits. If that profit-taking ball gets rolling, plenty of others will quickly find the same inspiration.
S&P 500 Daily Chart, with Volume and VIX 
Source: TradeNavigator
The NASDAQ’s charts don’t really look any different, by the way. As the weekly below shows us, the index is just bouncing out of its pullback and blasting past ceilings. Not gracefully. Just brute force.
NASDAQ Composite Weekly Chart, with MACD and VXN
Source: TradeNavigator
And that’s the problem. There’s no semblance of real reason about any of this. It’s just happening, driven by hope and presumption about the situation in the Middle East. That’s a pretty risky bet, however, as was noted.
So what’s the call? We’re looking for the bears to push back here, and soon. There’s no technical reason for this expectation. It’s just a judgment call. Any stumble also isn’t necessarily going to mark the beginning of a more serious corrective move though, as overdue as we may (still) be for one. We really need to watch what happens at some or all of the moving averages both indexes just hurdled to start getting a sense of what’s really happening here.
The crazy -- and somewhat bullish -- part about all of this? Neither the VIX nor the VXN soared, when they seemingly should have. That leaves stocks room to keep rising, even if they don’t necessarily keep rising right out of the gate this week. The market tends not to make a major top until the volatility indexes make a major low.
Whatever the case, buckle up for what’s apt to be a wild week ahead.