Weekly Market Outlook – Finishing Last Week on a High Note Doesn’t Change Much

Posted by jbrumley on August 26, 2023 1:41 PM

The market ended last week on a high note, bouncing back from an intraday loss on Friday to log a decent gain… for the day as well as the week. Nevertheless, the damage that was done over the course of the prior three weeks is still done. All of the indices are still trading below key technical ceilings, and the bullish effort on Friday was anything but enthusiastic. So far, we can only call this a lethargic dead-cat bounce.

We’ll dissect it all in a moment. Let’s first run through last week’s big economic announcements and then preview what’s coming this week. There are a couple of biggies in the lineup.

Economic Data Analysis

We continue the wave of real estate data with a look at last month’s new and existing home sales. As has been the case for some time now, existing home sales were weak, forcing sales of new homes instead. Overall though, total transactions are down; new homes only account for about 15% of all home sales. (Total mortgage demand is still at multi-year lows as well, and continues to fall.)

New, Existing Home Sales Charts

Source: Census Bureau, National Association of Realtors, TradeStation

We also got the third and final look at the University of Michigan’s sentiment index for August. Although down from previous estimates, it’s still clearly well up -- again -- from last year’s bottom.

Consumer Sentiment Charts

Source: Conference Board, University of Michigan, TradeStation

The Conference Board’s one and only measure of consumer confidence for the month is coming on Tuesday. It’s apt to fall just a bit, but like its University of Michigan counterpart, it’s clearly making bullish progress.

Everything else is on the grid.

Economic Calendar

Source: Briefing.com

We’ll round out August’s real estate report card this week on Tuesday, with the release of June’s Case-Shiller Index and the FHFA Home Price Index. Both have been edging higher, and will likely do so again despite falling overall sales. Limited inventory is keeping pricing power high.

Home Price Charts

Source: Standard & Poor’s, FHFA , TradeStation

Friday is the hold-onto-your-hats day. That’s when August’s jobs report is due. Economists believe the pace of job growth slowed from 187,000 in July to only 165,000 for the following month, but that should still be enough to pull the unemployment rate down to the recent record of 3.5%.

Unemployment Rate & Payroll Growth Charts

Source: Census Bureau, TradeStation

That being said, also note that we’ll be hearing August’s manufacturing report from the Institute of Supply Management. It should be up slightly from July’s reading, although the number remains relatively weak. Any reading below 50, in fact, is technically negative.

ISM Services and Manufacturing Index Charts

Source: Institute of Supply Management, TradeStation

August’s services index from the Institute of Supply Management won’t be coming out until Wednesday of next week. This number is still above 50, but as you can see, is also in a downtrend that won’t be quickly or easily broken.

Stock Market Index Analysis

We kick things off this week with a close-up look at the daily chart of the NASDAQ Composite. Notice where Thursday’s reversal from bullishness to bearishness took shape… right when the 50-day moving average line (purple) was touched. That didn’t just spark a reversal. It turned into an “outside day” reversal where the open was above the previous day’s high and the close was below the previous day’s low. It suggests a sweeping, rapid change of heart, and it happened a little too easily right where you’d fear it might happen.

NASDAQ Composite Daily Chart, with VXN

Source: TradeNavigator

Yes, the composite was bouncing back the very next day after making a slightly lower low. Take a close look at the middle section of the chart though. Not that Thursday’s big pullback was a high-volume affair, but Friday’s bounce effort was on even less volume. This isn’t the majority opinion that says there are more buyers out there waiting in the wings.

And the daily chart of the NASDAQ Composite above isn’t the only one indicating there’s still a lingering lack of buying interest in the tech-heavy NASDAQ, however.

We pointed to this information at the website several days ago, but it bears featuring here in the Weekly Market Outlook… the NASDAQ exchange’s depth (volume) and breadth (advancers versus decliners) has been and remains decidedly bearish. The moving average lines -- the bolder lines in the middle of all the erratic intraday data -- of the NASDAQ’s advancers and up volume (green) continue to move lower, while the moving averages of the NASDAQ’s decliners and down volume (red) are still edging upward. Notice that neither breadth nor depth were extraordinarily strong on Friday. In fact, they were just around average, underscoring the idea that Friday’s gain wasn’t exactly game-changing.

NASDAQ Composite Daily Chart, with Advancers, Decliners, Up and Down Volume

Source: TradeNavigator

The NYSE’s breadth and depth trends are similarly bearish, showing the same lack of backing behind Friday’s intraday bullish reversal.

The S&P 500 looks about the same, only needing to kiss its 50-day moving average line (purple) on Thursday to kick-start its dramatic rollover. It fought back a little on Friday, but not enough to jolt the market back into a bullish trend. And again, note the lack of volume behind Friday’s recovery effort.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeNavigator

Here’s the weekly chart of the NASDAQ Composite, for a little more perspective. Notice how the recent pullback ultimately started with a test of the technical ceiling that first started taking shape with last October’s reversal effort (dashed). Also note that even with the scope of the recent selloff the index hasn’t yet broken under its 100-day moving average line (gray). In fact, it almost looks like the 100-day line is acting as a technical floor.

NASDAQ Composite Weekly Chart, with VXN and Volume

Source: TradeNavigator

At the same time, it’s becoming increasingly undeniable that the NASDAQ’s volatility index (VXN) is trying to curl its way higher again after falling to multi-year low just a few weeks back. It’s a loose hint that at least some traders are starting think -- and even act as if -- a pullback that needs to be hedged is brewing. If they’re thinking it, they may soon start making it happen.

Things are net-bearish here. Thanks to Friday’s effort though, there’s enough of a glimmer of bullish hope to not make a major bearish bet just yet. If the volatility indices make higher highs and the market indices break below their 100-day moving average lines, that opens the door to meaningfully-lower lows.