Weekly Market Outlook - That Was a Reversal Signal, But a Stimulus-Induced One

Posted by jbrumley on March 29, 2020 7:18 PM

The ending was a bit of a disappointment, with the S&P 500 logging a 3.4% loss on Friday. Still, what a week. The 17.7% rally between Monday's and Thursday's closes translated into a full-week gain of 10.2%, which is the best week for the market since 1938. Not bad.

We're still in no-man's land, of course. This "best week" for stocks follows a "worst four weeks" for the market, which shaved a total of 30.8% off the S&P 500's value before the bulls finally started to fight back. It's entirely possible last week was only a dead-cat bounce induced by news of the stimulus, and we could still see a renewed downtrend reshape from here. It all depends on the perception of the impact of the coronavirus.

Still, we'll look at the charts because anywhere we go from here will start out where we left off on Friday, and lots of people think things have fallen enough. Before we get to that, however, let's recap last week's big economic announcements and preview this week's.

Economic Data Analysis

Don't make too much of any economic data from this point forward. Most of the strong data reflects the pre-coronavirus environment in February, and most of the weak data is apt to be a one-off that will at least start to abate going forward (with stimulus checks in hand). Still, where we start to rebuild is where we left off. So...

Sales of new homes through February remained brisk, with economists expecting an annualized pace of 765,000 following January's upwardly-revised figure of 800,000. Making that matter even more amazing is the fact that sales are -- were -- rising despite shrinking levels of available inventory.

New Home Sales, Inventory Index Charts

Source: St. Louis FRED

The only other items of interest last week was the finalization of Q4's GDP growth number, and the last tabulation of the Michigan Sentiment Index reading for March. As expected, the nation's GDP improved at 2.1% a quarter ago, though that number is irrelevant given the situation. And, not surprisingly, sentiment plunged to 89.1, reflecting the gravity of the same situation. That could have been worse.

Michigan Sentiment Index Chart

Source: YCharts

Everything else is on the grid.

Economic Calendar

Source: Briefing.com

We'll round out the look at the sentiment landscape on Tuesday when we hear from the Conference Board, but look for the same basic -- though not devastating -- pullback. Also on Tuesday keep your eyes peeled for the S&P Case-Shiller Home Price Index. That's through January, so it should be a solid figure. Again though, that was pre-COVID-19.

Case-Shiller Home Price Index Chart

Source: YCharts

All eyes will certainly be on Wednesday's ISM Manufacturing Index report followed by the ISM Services Index report sometime later in the week; the timing of each release is still subject to external factors. Either way, economists are planning on a sizeable drop for both after each seemingly started to work on rebounds.

ISM Services, Manufacturing Survey Charts

Source: YCharts

We'll get March's auto sales data on Wednesday. Not surprisingly, it should be a rough one for an industry that was already starting to slip. Ironically, a bad month or more followed by an economic rebound (assuming one takes shape quickly) might just be a much-needed reset for the business.

Auto Sales Charts

Source: YCharts

This week's biggie, of course, is Friday's jobs report. Economists are expecting a nasty one, but investors may have already braced for it, and priced it in. Still, take the current outlooks with a grain of salt. Forecasters have literally never faced anything quite like this, and are throwing darts with a blindfold on. The good news is, employment was one of the economy's strongest aspects before the coronavirus took hold, so the overall jobs picture is still, relatively speaking, not bad. It just needs to survive the jolt and get back to normal quickly.

Payroll Growth, Unemployment Rate Charts

Source: YCharts

Stock Market Index Analysis

This week starts with a look at the weekly chart of the S&P 500, as in this timeframe we see a pretty compelling glimmer of hope. Here we see a close above the previous week's open, and an open below the previous week's open.... with the latter of the two weeks pointed in the opposite direction (higher). This so-called "engulfing bar" indicates a sudden and sweeping change of heart among traders. More important, these is the kind -- and placement -- of bar one would expect to see when a major reversal gets going. This one, hopefully, will be the V-shaped reversal we hope it is.

S&P 500 Weekly Chart, with VIX and Volume

Source: TradeStation

Zooming into the daily chart adds some detail to the weekly chart. Namely, in the shorter-term timeframe we can see the rally effort was stopped abruptly on Friday as we got close to the 20-day moving average line (blue). But, we can also see Friday's sizeable loss was a low-volume matter, meaning most people were sticking with most stocks they bought over the course of the prior three trading days. In fact, even for the folks hoping for and expecting more upside, Friday's lull may ultimately serve as a much-needed reset of the advance.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeStation

The same "outside day" bar -- for the week -- applies to the NASDAQ Composite, but there's a more important nuance of the NASDAQ's weekly chart we want to point out today.

You may recall several days ago we plotted Fibonacci retracement lines for the NASDAQ's weekly chart, explaining the 6528, 38.2% retracement of the entire bull market looked like the most plausible "enough is enough" point for the index. The composite fell to 6631 last week, which may well be close enough to count as a full Fibonacci retracement. You can also (still) see the VXN almost kissed a record high of just under 90 two weeks ago, suggesting fear-based selling has peaked.

NASDAQ Composite Weekly Chart, with VXN

Source: TradeStation

Zooming into the daily chart of the NASDAQ Composite tells the same basic story as the S&P 500's. That is, the 20-day moving average line (blue) at 7775 may be something of a test, and there wasn't a ton of volume behind Friday's stumble. The NASDAQ also shows us something else that applied to the S&P 500 though... the big bullish gap left behind by Tuesday incredibly strong opening. Generally speaking, the market doesn't like to leave gaps unfilled, meaning the index may be pressured lower to fill it in before it resumes the rally. Problem is, if stocks start to lose that kind of ground again, that may strike new fear into the hearts of investors, jump-starting a selloff that takes stocks to new lows.

NASDAQ Composite Daily Chart, with VXN

Source: TradeStation

With all of that being said, anything is possible from here, with the COVID-19 situation firmly in control of perception, reality, and assumptions about the future. The market is oversold and undervalued, and though not tomorrow, the coronavirus outbreak will abate. The economy, companies, and consumers are in good position to drive a recovery once one can begin. But, fear could easily cause selling in the immediate future, at the drop of a hat. Keep playing it close to the vest, and don't dig in too deep... on either side of the fence.

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