Weekly Market Outlook – Just When It Mattered the Most, the Bulls Flinched

Posted by jbrumley on October 14, 2023 8:42 PM

This market isn’t just erratic and inconsistent. It’s maddening. Just when it looks like it might break past a key technical ceiling and finally keep moving, it turns tail and runs. Except, it doesn’t. Friday’s tumble stopped right at other key technical levels. Stocks very much ended last week on the fence, capable of still moving either direction. Ugh.

We’ll take a detailed look at this extreme indecision in a moment. First, let’s recap last week’s biggest economic announcements and preview what’s coming this week. It’s a big one, particularly for real estate.

Economic Data Analysis

Last week’s only major news was updated inflation data for September. Some of it was up. Some of it was down. Mostly though, price increases remain at relatively higher levels. Even the core inflation numbers’ (consumer as well as producer) rekindled downtrend leaves that at high-ish levels.

Inflation Rate (Annualized) Charts

Source: Bureau of Labor Statistics, TradeStation

With all of that being said, we’re seeing a clear divergence between overall inflation and core inflation, the latter of which considers things like food and gasoline. As long as grocery and gas costs are falling, consumers may be okay with slightly (or even not-so-slightly) elevated prices. That’s a tailwind for the market, even if it won’t stave off short-term stumbles.

Everything else is on the grid.

Economic Calendar

Source: Briefing.com

This week is going to be a whopper.

The party gets started in earnest on Tuesday with a look at last month’s retail sales. They should be up again, but not nearly as much as they were in August. Even so, the trend here remains bullish no matter what you consider as retail sales. Consumers continue to do their part.

Retail Sales Charts

Source: Census Bureau, TradeStation

Tuesday’s look at last month’s industrial production and capacity utilization are going to be more important than most traders recognize. Economists believe we’ll pretty much see August’s numbers again, which is pretty good… particularly for capacity utilization, which is near its absolute peak near 80%. Also take note of the fact that actual production has been slowly but steadily trending higher since early this year.

Industrial Production and Capacity Utilization Charts

Source: Federal Reserve, TradeStation

Last month’s housing starts and building permits will be reported on Wednesday. The numbers should be pretty close to August’s levels… down a little for permits, but up a little for starts. That pending recovery effort for starts, however, still leaves it an unusually low levels, while that expected dip in newly-issued permits potentially signals a quelling of a budding rebound.

Housing Starts and Building Permits Charts

Source: Census Bureau, TradeStation

Whatever the numbers end up being, the broad data and trend here points to weakness.

Last but not least, look for existing home sales data to be released on Thursday. Economists believe we’ll see a slight slowing from August’s pace, but August’s pace is near a multi-year low. Blame a combination of high interest rates and a lack of inventory.

New, Existing Home Sales Charts

Source: National Association of Realtors, Census Bureau, TradeStation

September’s new home sales numbers will be reported next week. Keep in mind that in light of an extreme housing shortage, a lack of existing homes for sale helps drive sales of newly-built houses.

Stock Market Index Analysis

Just when it looked like stocks were over the hump, they didn’t follow through. Instead, they retreated, undermining what looked like a great beginning to another bullish phase… maybe even the confirmed beginning of a new bull market.

Take a look at the daily chart of the S&P 500 below to see what we mean. The index started to approach the now-converged 50-day (purple) and 100-day (gray) moving average lines at 4404 around the middle of the week. Rather than going ahead and punching through them though, the buyers retreated without ever attacking. Friday’s close of 4327.78 could have been even worse had the S&P 500 not found support at its 20-day moving average line (blue) right below there. Also notice that the former floor at 4331 (yellow, dashed) may be coming into play again.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeNavigator

The daily chart of the NASDAQ Composite looks similar, although it’s arguably more agonizing. It actually poked above the convergence of its 50-day and 100-day moving average lines at 13,608 on Wednesday. By Friday it was testing its 20-day moving average line (blue) at 13,368 as a floor.

NASDAQ Composite Daily Chart, with VXN and Volume

Source: TradeNavigator

Also take note of the fact that both of the index’s volatility indexes (VXN and VIX) tested … well, retested their key technical ceilings on Friday. Neither of them actually poked above these resistance levels, just as neither the NASDAQ nor the S&P 500 fell below their 20-day moving average lines (blue).  All of these events could happen in the immediate future though, changing everything for the worse in a hurry. That’s the biggest thing we’ve got on our radar right now.

Here's the weekly chart of the S&P 500, for a little added perspective. Notice that the 200-day moving average line currently intercepts with a rising straight-line support level (light blue, dashed) connecting every major low from last October’s low. That floor was basically tested a couple weeks ago, and remains within striking distance along with the 200-day line itself. Should both support levels fail, that’s another bearish game-changer for the market.

S&P 500 Weekly Chart, with VIX and Volume

Source: TradeNavigator

If we have to lean one direction or the other here, we’re leaning cautiously bearish. Stocks are just one or two bad days away from slipping under a huge technical floor, and it’s increasingly looking like traders are expecting it to happen, and even want it to happen.

The good news is, if that should happen, it should also be the stumble that sets up and then kicks off the usual year-end bullishness. Don’t read anything too long-term into such a stumble.