Weekly Market Outlook – A Failure to Follow Through Leaves Stocks Dangerously on the Precipice

A couple weeks ago (during Christmas week) the S&P 500 fought its way to a new record high. But, it was a suspiciously-difficult effort, and seemingly remained vulnerable to long-overdue profit-taking. Thanks to last week’s seemingly-modest loss, is back on the verge of a major breakdown that -- once it gets going -- could prove very difficult to stop before doing some pretty significant damage.

It’s not too far gone yet though. It’s just uncomfortably close.

We’ll look at how close (and why, and where) in a moment. Let’s first work our way through what little economic data we heard last week, and preview what’s in the lineup for the week ahead.

Economic Data Analysis

The New Year’s Day holiday may have shortened the total trading week. But, we still got a couple of related reports worth mentioning. That’s the Case-Shiller 20-City Home Price Index, and the FHFA Home Price Index, both for October, and both released on Tuesday. As has been the case for a while now, the Case-Shiller index fell, while the FHFA index moved higher. It remains a sign that the real estate market in and around metro areas continues to weaken, while more rural areas’ home prices are holding their ground (perhaps underscoring the argument that people are indeed abandoning bigger cities for more affordable rural venues).

Home Price Index Charts

Source: Standard & Poor’s, FHFA, TradeStation

Everything else is on the grid.

Economic Data Report Calendar

Source: Briefing.com, TradeStation

We’ll start the new week running with Monday’s ISM Manufacturing Index for last month, followed by the ISM Services Index update on Wednesday. Both should be up a little from November’s levels. In neither case, though, will these numbers point to convincing strength.

ISM Manufacturing, Services Index Charts

Source: Institute of Supply Management, TradeStation

Friday will be a particularly busy day. That’s when we’ll get December’s jobs report. Economists expect payroll growth to slow from a pace of only 64,000 to 54,000, which will be just enough to allow the unemployment rate to inch up from 4.6% to 4.7%. With Q3’s initial GDP growth rate estimate of 4.3% though, perhaps the economy isn’t losing quite as much ground as believed. That, or things have taken a measurable turn for the worse since the end of September (which is arguably possible).

Payroll Growth, Unemployment Rate Charts

Source: Bureau of Labor Statistics, TradeStation

Regardless, it’s going to take a massive effort to turn the jobs trends around -- and the market badly needs a reversal on this front.

Also on Friday look for last October’s housing starts, although it’s not clear of the Census Bureau intends to release its building permits figures for the same month at the same time. If not, look for those numbers soon enough. Either way, forecasters are calling for a slight increase of September’s annualized rate. It will take considerably more to reverse these weak trends… especially the building permits trend.

Housing Starts, Building Permits Charts

Source: U.S. Census Bureau, TradeStation

Yes, given all the data we do have in-hand, it’s difficult to deny the overall real estate industry isn’t (still) in some pretty serious trouble here.

Stock Market Index Analysis

Two weeks ago, it looked like the market’s rally was still underway. The S&P 500 has inched its way into record-high territory, and was finding some support at well-established technical floors. And, perhaps the rally is still fully intact.

Once again, however, the market is putting an uncomfortable amount of pressure on its technical support. One bad week could still cause a sizeable degree of technical damage, opening the door to a more serious wave of profit-taking.

The weekly chart of the S&P 500 tells the story in an instant. Two weeks ago, the index broke above a well-established horizontal ceiling at 6,888 (green, dashed), but didn’t follow through this past week. Instead, the S&P 500 is now -- again -- testing the rising support line (blue, dashed) that connects all the lows going back to April’s; most of those lows were made just since November.

S&P 500 Weekly Chart, with MACD and VIX

Source: TradeNavigator

Zooming into the daily chart of the S&P 500 gives us a little more detail on the matter. Namely, it shows us that the index is also still finding support at its 50-day moving average line (purple), which is currently intercepted with longer-term straight-line support.

S&P 500 Daily Chart, with Volume and VIX

Source: TradeNavigator

Even so, a scrutinizing look at the daily chart above underscores something that’s plainly evident on the weekly chart. That’s waning momentum. The S&P 500’s higher highs and higher lows are shallowing, or flattening. Indeed, the weekly chart’s MACD lines have been bearish since November, and are still just as diverged as they’ve been since then.

The NASDAQ Composite chart looks similar, even if not identical. Like the S&P 500, it’s still being steered higher within the confines of well-established rising trading range. But, it’s putting an increasing amount of pressure on the lower boundary of this channel. And like the S&P 500, the NASDAQ’s MACD lines have been leaning bearishly since November, and are technically growing more and more bearish.

NASDAQ Composite Weekly Chart, with MACD and VXN

Source: TradeNavigator

Here’s the daily chart of the NASDAQ Composite. This doesn’t show us much more, except for the fact that the composite made an bearish “outside” bearish bard on Friday (a sweeping intraday reversal from a gain to a loss) that ended up leaving the NASDAQ under its 50-day moving average line (purple). This isn’t in and of itself a rock-solid sign of more selling to come. It is telling, however, that this is the third test of an important support line, with the last two materializing after the NASDAQ failed to move above what ended up being horizontal resistance at 23,655.

NASDAQ Composite Daily Chart, with Volume and VXN

Source: TradeNavigator

The only thing we can do -- or should do -- right now is wait. There’s no real room between support and resistance for either of the indices to continue moving around. Either the bulls are going to have to commit to pushing stocks above significant technical resistance, or the bears are going to have to commit to dragging the indices below support. Once that commitment is made, several weeks’ worth of stagnation should start to unravel and unwind. We can make a more confident call then.

Given stocks’ steep valuations and the age of this rally though, we’re inclined to expect some sort of corrective move sooner than later. But, it will be a buying opportunity.