Weekly Market Outlook – The Rally Showed It’s Vulnerable. It Didn’t Say It Was Ready to End.
Despite the impressive midweek effort, nearly all the work the bulls were able to hammer out last week was unwound on Friday. All told, the S&P 500 only gained 0.1% for the five-day stretch, giving up most of what was at one point was nearly an 0.8% gain.
It’s still too soon to say this is the beginning of a more prolonged -- and overdue -- corrective move. The market was really, really overextended by Thursday, up nearly 19% just since late-March’s low. That left it ripe for a stumble. It’s the sheer size and scope of this rally, however, that leaves stocks vulnerable to a fair amount of more profit-taking ahead.
Then there’s the other things that are (finally) starting to say the weight of the recent gains and the market’s overall valuation are weighing it down.
We’ll look at these things in some detail in a moment. Let’s first run through last week’s economic news that caused this whipsaw in the first place.
Economic Data Analysis
Things got going on Monday with April’s sales of existing homes, from the National Association of Realtors. Existing home sales barely ticked up from March’s pace of just over 4.0 million, falling short of the 4.1 million economists were modeling. More important, home purchases remain at pretty poor levels.
New, Existing Home Sales Charts
Source: Census Bureau, National Assn. of Realtors, TradeStation
The Census Bureau is going to post April’s new home sales numbers the week after this one. There’s no forecast yet, but clearly this data illustrates the same lack of interest (or lack of ability) to buy.
Inflation was of course last week’s biggest news. On Tuesday we learned last month’s consumer inflation rate hit 3.8% (2.8% not counting food and fuel), while on Wednesday we got April’s producer inflation of 6.0%, and 4.4% on a core basis. Both were well up from March’s numbers, but more than that, came in higher than expected.
Consumer, Producer Inflation Rate Charts (Annualized)
Source: Bureau of Labor Statistics, TradeStation
It’s not exactly clear why investors remained so bullish in the wake of these two reports. If anything, at the very least it forces the Fed to rethink any rate cut decisions in the foreseeable future. It could be a reason to raise interest rates, just to cool off the demand that’s driving prices higher. The market interpreted the willingness to spend as bullish though…
… a decision that was affirmed on Thursday with last month’s retail sales report. Consumerism accelerated from March’s growth rate -- by all measures -- and by more than expected. Again, investors saw this willingness and ability to spend as bullish, ignoring that it leaved the Federal Reserve less room to lower rates -- not more.
Retail Sales Charts
Source: Census Bureau, TradeStation
Finally, on Friday we heard April’s capacity utilization and industrial production data. It was healthy, improving on March’s lull, and by more than economists were anticipating. In fact, given the longer-term trends now in place with these numbers, we’d have to say the nation’s overall factory activity is net-bullish.
Industrial Production, Capacity Utilization Charts
Source: Federal Reserve, TradeStation
Everything else is on the grid.
Economic Data Report Calendar
Source: Briefing.com, TradeStation
There’s not a whole lot on the calendar for this week, although there are a couple items of interest.
The first of these is Thursday’s look at housing starts and building permits for April. Forecasts suggest a slight lull for starts, and no change in permits. Take those predictions with a grain of salt though. The last few haven’t all been on target. Mostly we’re still trying to make sense of the seemingly-opposing trends in place as of March.
Housing Starts, Building Permits Charts
Source: Census Bureau, TradeStation
The only other report we’re eying for the week ahead will be Friday’s look at May’s consumer sentiment from the University of Michigan. Economists still believe it’s going to remain at a multiyear low for the month, calling into question how and why the market is still rallying.
Consumer Sentiment Charts
Source: University of Michigan, Conference Board, TradeStation
The Conference Board’s consumer confidence score for May will be posted next week. It too, of course, says people are feeling pretty hopeless here.
Stock Market Index Analysis
Yes, this is all getting pretty complicated.
We’re starting this week’s discussion with a look at the daily chart of the S&P 500, just to make that very point. After a brief pause in mid-April, the bulls regrouped and were content to continue pressing up and into the upper edge of a moving average envelope (yellow)… right up until they weren’t. It all unraveled on Friday, with no obvious catalyst. (Solid capacity utilization and industrial production numbers wouldn’t have prompted the pullback. If anything, it gives the Fed more reason to raise rates than lower them. The approaching weekend is a more likely reason for the reversal… traders don’t want to hold overbought stocks into a weekend where anything could happen.)
S&P 500 Daily Chart, with Volume and VIX 
Source: TradeNavigator
The daily chart of the NASDAQ Composite looks similar, although not identical. Like the S&P 500, the composite was feeling the weight of a very big runup moving into the weekend. Traders just decided to de-risk things just a bit.
NASDAQ Composite Daily Chart, with Volume and VXN
Source: TradeNavigator
The NASDAQ’s daily chart shows us something else that’s subtly telling though. At the bottom of the chart, the NASDAQ Volatility Index (VXN) has been drifting higher since the beginning of the month… a time when it should have been moving lower, and even testing absolute lows while the composite was making record highs. It’s an indication that traders never really had a ton of confidence in the rally. Modest volume on the way up suggests the same thing.
This still doesn’t guarantee Friday’s stumble is the beginning of something more. There’s clearly plenty of room for more selling though.
And when we zoom out to the weekly chart of the NASDAQ Composite we can see more about why this pivot may be happening where it is. The index bumped into a long-term technical ceiling a couple weeks ago, without actually punching through it. It tried to do so last week, but when push came to shove, the bulls didn’t have enough shove. The end result was a doji bar (where the open and the close are in the middle of a tall low-to-high range), which is a hint of a pivot in and of itself. In this case, the only applicable pivot would be from a rally into a pullback. If that’s what’s in store, a trip back to the 24,200 area would be a good downside target.
NASDAQ Composite Weekly Chart, with MACD and VXN
Source: TradeNavigator
And for what it’s worth, while we’re not showing it here, the S&P 500’s doji bar on its weekly chart is even more suggestive that it’s pivoting out of an uptrend and into a downtrend.
The chief problem with any of this outlook is that headlines could still defy the odds and logic. Traders still can’t get enough of artificial intelligence stocks. And, if the conflict with Iran suddenly ends, traders are apt to celebrate that too… rather than “sell the news.”
The point is, we still want to take this one day at a time, and not try and be too presumptive. This isn’t the right backdrop for that.