Weekly Market Outlook – The Spring is Coiled Dangerously Tight
Another week without any real progress outside of what’s now become a very narrow trading range. We would have hoped/expected some catapult-like action out of it by now. But, no such luck. Still, the ultimate impact of the lack of net action is an even more explosive move once one side of the table or the other finally commits. And, as has been the case in recent weeks, the lines in the sand that mark either of these moves are now even more defined.
We’ll look at all of it in a moment. Let’s first look at last week’s biggest economic reports and preview what’s on the schedule for this week. Curiously, most of the data is inching in a bullish direction…. sort of.
Economic Data Analysis
Last week’s big news of course was the decision from the Federal Reserve to leave the Fed Funds Rate alone, and likely for at last a few more months. Fed Chairman Jerome Powell essentially said h’s happy with the way things are now.
And he’s not wrong in his assessment. We heard December’s producer inflation data on Friday, and while a little higher than we might normally like, it’s stabilizing at acceptable levels. So is the consumer inflation data we got a couple weeks back.
Consumer, Producer Inflation Rate Charts (Annualized)
Source: Bureau of Labor Statistics, TradeStation
Home prices are… well, it’s more good than not. While they’re stabilizing at uncomfortably high levels, both the Case-Shiller Index and the FHFA Home Price Index look like they want to hold their ground (at least through November).
Home Price Index Charts
Source: Standard & Poor’s, FHFA, TradeStation
You may also recall that since November, sales of new and existing homes have moved higher. Purchase activity is still nowhere near what it was prior to the pandemic, but there is reason for hope. On the flipside, bear in mind that housing starts and building permits are back at multiyear lows. This still doesn’t tell the whole story though. Most of the housing market still reflects existing homes rather than newly-built ones. Let’s just say we’re cautiously optimizing in terms of residential real estate.
Last but not least, we got the last bit of consumer confidence we’re going to get for January last week. Although it’s not yet plotted on our chart below, the Conference Board’s consumer confidence reading slumped to a multi-month low of 84.5. Meanwhile, the University of Michigan’s consumer sentiment measure actually ticked a little higher to 56.4. Either way, consumers’ view of the future remains pretty darn grim.
Consumer Confidence Charts
Source: Conference Board, University of Michigan, TradeStation
Just take this data with a big grain of salt. Although it’s usually pretty telling, there seems to be something of a disconnect with it of late. People may be mistaking sociocultural strife with economic conditions, the latter of which remains reasonably ok.
Everything else is on the grid below.
Economic Data Report Calendar
Source: Briefing.com, TradeStation
This week’s biggest news will of course be the jobs report for January. You may recall the pace of net payroll growth continues to dwindle, but at only 4.4%, the unemployment rate remains healthy enough. You can bet all eyes will be on these numbers this time around, with traders looking for any hint of what to expect from stocks next. The market seems to know things could still go either way.
Unemployment Rate, Payroll Growth Charts
Source: Conference Board, University of Michigan, TradeStation
That’s not the only economic information we’ll be receiving this week though. On Monday look for January’s manufacturing activity index from the Institute of Supply Management, with the ISM’s look at the nation’s services industries on Wednesday.
ISM Services, Manufacturing Index Charts
Source: Institute of Supply Management, TradeStation
It’s getting difficult not to notice these two data sets are moving in the opposite direction, which is more bad than good. This contrast loosely hints that more lower-paying service jobs are being offered and taken, while the nation’s once-rebounding manufacturing arm is slowing down, dragging a key part of the economy -- and corporate profits -- with it.
Stock Market Index Analysis
It’s like the market is watching its own charts, recognizing its own boundaries. Which in some regards it is, because enough traders know where its technical walls and ceiling are, and are responding -- steering -- accordingly. Nobody wants to commit to a move outside of these boundaries though… at least not yet. The longer the indexes simply work their way toward the tips of ever-narrowing trading ranges, however, the more explosive the move is once we get it.
Nowhere is this more evident than with the daily chart of the S&P 500. Take a look. Our apologies for all the dashed lines. But, they all matter, because in one way or another they’re all serving as support or resistance. It’s also no coincidence that many of them are starting to overlap, with the index itself still testing them with rather incredible precision.
S&P 500 Daily Chart, with Volume and VIX 
Source: TradeNavigator
It’s subtle, but also notice the index is being increasingly squeezed by its converging support and resistance lines. Something’s got to give soon.
Zooming out to the weekly chart of the S&P 500 really reminds us how close the index remains to tumbling under what’s turned into rather important floor extending all the way back to June of last year (purple, dashed). And, this same weekly chart reminds us that even though the S&P 500 may still be inching higher, somehow the MACD lines remain in bearish mode.
S&P 500 Weekly Chart, with MACD and VIX
Source: TradeNavigator
The same goes for the NASDAQ Composite’s weekly chart, by the way, although there’s something else worth drawing out there. That is, unlike the S&P 500, the NASDAQ’s rally stopped right at a technical ceiling around 23,965, where the index peaked in late October. That’s not a coincidence.
NASDAQ Composite Weekly Chart, with MACD and VXN
Source: TradeNavigator
Also notice on the daily chart below that Wednesday’s high near that mark touched a resistance line that’s only been in place since late December. This isn’t unusual either though. Eventually near the end of prolonged moves, several support and resistance lines will begin aligning as traders try to find ways of applying whatever frameworks they can to the action in an effort to get a handle on it… they create the handles that they can.
NASDAQ Composite Daily Chart, with Volume and VXN
Source: TradeNavigator
With all of that being said, we want to point out a couple of bearish hints on both daily charts above that are so subtle you may not even notice them.
First, in both cases the bearish volume has been greater than the bullish volume since the middle of January… even if the market technically hasn’t lost ground since then. And second, both the VIX and VXN have been inching higher, but without surging higher. This suggests they’re expecting to need to play defense soon; they may end up creating a self-fulfilling prophecy. We just can’t trust that prospect until we start seeing both indexes breaking under their well-defined technical floors.