Weekly Market Outlook – Still Not The Kind of Recovery Effort the Bulls Want to See

Posted by jbrumley on May 3, 2024 9:53 PM

A tough week turned real bullish real fast on Friday thanks to a poor jobs report for April. Payroll growth came up short of expectations, pushing the unemployment rate up, and leading traders to believe the Fed may be cutting interest rates sooner than expected after all. That’s (perceived as being) bullish for stocks.

Still, it might be a bit too soon to come to a sweeping bullish conclusion about the market’s foreseeable future.

We’ll show you why below. First though, let’s look at last week’s economic reports. They were mostly not-good, which is why the market did so well for a second week in a row -- again, it gives the Fed a little more room to lower rates sooner than later. Also again though, let’s not jump to conclusion. There are a couple of red flags waving here.

Economic Data Analysis

It was a busy week, ending with last month’s aforementioned jobs report. But, there was plenty of other data released last week to sift through.

Take updates on U.S. home prices as an example. Although both announcements were for February’s data, the Case-Shiller Home Price Index as well as the FHFA Home Price Index were updated on Tuesday. And, both indicated an uptick in average home values after a January lull.

Home Price Index Charts

Source: Standard & Poor’s, FHFA, TradeStation

There’s more to the story here, of course. These home price values only reflect the price of homes sold, and not the number of home-buying transactions. Still, these are mostly-decent numbers in light of the fact that home sales are more or less level while housing starts and building permits are… well, were in the same condition. Both fell to multi-month lows last month, re-casting a shadow of doubt on the real estate market’s health.

We also got April’s ISM numbers this week. You may recall manufacturing was on the mend while services were falling. Well, both fell last week, with each index sliding back under the critical 50 level that separates growth and contraction.

ISM Services and Manufacturing Index Charts

Source: Institute of Supply Management, TradeStation

It’s too soon to suggest the budding rebound from the manufacturing index has been snapped. But, the continued deterioration of the services barometer is troubling… particularly in light of the other data we got this week.

Yes, that’s last month’s jobs data. Payroll growth of only 175,000 jobs was well shy of the expected 240,000… shy enough to let the unemployment rate tick up to 3.9%. That’s still healthy, but the trajectory is the key; all big trends start out as small ones.

Unemployment Rate and Payroll Growth Charts

Source: Census Bureau, TradeStation

Everything is on the grid.

Economic Calendar

Source: Briefing.com

There’s nothing of any real interest coming this week, except for perhaps Friday’s consumer sentiment figure from the University of Michigan. Even so, this will only be the first of three updates for May. It could change quite a bit between now and then. That being said, do know that we got the Conference Board’s one and only look at consumer confidence for April on Tuesday of last week. It fell quite a bit, from 103.1 to a multi-month low of 97.0. Economists expect the Michigan number to follow suit, albeit not quite as dramatically.

Consumer Sentiment Charts

Source: University of Michigan, Conference Board, TradeStation

This deteriorating consumer optimism of course bodes poorly for the stock market despite last week’s eventual bullishness.

Stock Market Index Analysis

It was anything but an ideal move, but the bulls made it happen nonetheless. Following through on Thursday’s intraday turnaround, the NASDAQ Composite ended up logging nearly a 1.3% gain last week by pushing up and off of its 100-day moving average line (gray). When all was said and done, the index even managed to fight its way back above its 50-day moving average line (purple). That’s a clear technical victory for the bulls.

NASDAQ Composite Daily Chart, with VXN and Volume

Source: TradeNavigator

The S&P 500 took a similar path, with one noteworthy exception -- it didn’t clear its 50-day moving average line (purple) at 5,129. Nevertheless, the index still managed to eke out a 0.5% weekly win. That’s the second winning week in a row… a win made even more bullish by the fact that the S&P 500 just made its highest close since mid-April.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeNavigator

There are a couple of arguments against a bullish interpretation of last week’s action, however. Chief among them is the lack of volume behind Thursday’s and Friday’s gains. This is true of the NASDAQ as well as the S&P 500.

And the other red flag? The big gaps left behind by Friday’s bullish open. The market generally doesn’t like to leave gaps behind. These will beckon stocks lower, perhaps starting the pullback most bulls don’t want to see take shape here.

That doesn’t mean a continue of the rally can’t or won’t materialize -- that may well be what’s in the cards. Until we clearly know that’s the more likely outcome though, we’ll continue to plan for a renewal of the market’s broader weakness. To this end…

We mentioned last week that we’d talk about downside targets this week. Here we go. We’ll be using Fibonacci retracement lines as our framework. Namely, the 38.2% Fibonacci retracement of the rally from October’s low to March’s high sits at 4,574, which is more or less in line with the brim line of the cup and handle pattern that played out over the course of the 2022 and 2023. The convergence of these two important levels makes them doubly tough as potential floors.

S&P 500 Weekly Chart, with VIX and Volume

Source: TradeNavigator

Do understand that Fibonacci retracement lines aren’t necessarily etched in stone as support and resistance levels. They are high-probability floors and ceilings though, and are particularly useful when there’s little other technical framework to work with… as is the case right now. Until there’s a more relevant floor to look at, this is the best one to consider. We’re still leaning toward a move to that level before all is said and done.

A pullback to that line would mark a 12.5% correction, by the way. That’s a normal, healthy-sized dip that will allow the bigger-picture rally to reset itself.