Weekly Market Outlook – End of the Line for the Bulls?
The bulls tried, but when all was said and done, they just didn’t make the progress they needed to make last week.
That doesn’t mean the bears did either. In fact, although the S&P 500 as well as the NASDAQ Composite both ended up suffering a slight loss last week, both are also still finding technical support right where they need to find it. Both indexes are clearly showing signs of struggle under the weight of their recent gains though. One or two more bad days could still crack these technical floors, opening the door to a much bigger (and long overdue) corrective move. Where it ends up stopping – if it ends up mattering – is still anybody’s guess.
The good news is, the bulls’ and bears’ hands are now both being forced. We should have some clear answers sooner than later, and possibly this week.
We’ll dissect it all in a moment. First, let’s run through last week’s most important economic announcements and preview what’s coming this week.
Economic Data Analysis
Last week’s top news was of course December’s inflation reports. And, the good news is, there’s still not much of it. With the exception of the measurable uptick in core producer inflation – again – to an annualized rate of 3.5%, price increases remain in nominal, targeted levels. This leaves the Fed room to proceed with plans to lower interest rates a few times this year, although the FOMC doesn’t exactly need to do so. Things are pretty much in check on this front.
Consumer, Producer Inflation Rate (Annualized) Charts
Source: Bureau of Labor Statistics, TradeStation
Retail sales (across the board) also continued to make slow and steady forward progress. Consumers are doing their part to keep things chugging along.
Retail Sales Charts
Source: Census Bureau, TradeStation
We also heard a round of updates regarding home sales last week, with new home sales of 737,000 (annualized) for October being reported on Tuesday following Wednesday’s existing home sales report of 4.35 million for December. And this forces investors to accept a difficult-to-believe truth about the confusing housing market right now. That is, while pricing may still be “off,” there’s no denying we’re at least seeing some uptick in total transactions after a lethargic couple of years.
New, Existing Home Sales Charts
Source: Natl. Assn. of Realtors, Census Bureau, TradeStation
Finally, on Friday we got December’s capacity utilization and industrial production data from the Federal Reserve. It was good. As was the case with home sales, we’re now seeing clear growth progress with both measures, much of which was somewhat unexpected.
Capacity Utilization, Industrial Production Charts
Source: Federal Reserve, TradeStation
Don’t dismiss this. Although these numbers have little bearing on the market’s near-term ebb and flow, capacity usage and industrial output move in close tandem with earnings as well as the market’s longer-term, bigger-picture direction.
Everything else is on the grid.
Economic Data Report Calendar
Source: Briefing.com, TradeStation
There’s not a whole lot in the lineup for this holiday-shortened week. In fact, the only items of interest are Thursday’s look at consumer spending and personal income, followed by Friday’s third and final look at the University of Michigan’s sentiment measure. Personal income and spending plays a big role in the Fed’s decision regarding interest rates. As for sentiment, forecasts are calling for a slight improvement, but certainly not enough improvement to shove this economic barometer decisively off of its recent low.
Consumer Confidence Charts
Source: University of Michigan, Conference Board, TradeStation
The Conference Board’s comparable consumer confidence figure for January won’t be updated until Tuesday of next week, although we don’t anticipate any major changes with it either. Just don’t read too much into either one. The pessimism does jibe with the fact that both indexes could be close to breaking into a more serious corrective move. But, it’s not necessarily a long-lived warning. It may be a contrarian bullish flag, in fact.
Stock Market Index Analysis
Last week we mentioned that the NASDAQ Composite was testing a somewhat-established technical ceiling around 23,735. It continued to test it last week, briefly moving above it Monday and Tuesday, in fact. It couldn’t muster a close above that mark, however, and when all was said and done ended up closing -- albeit just barely -- below the rising support line that had been steering the NASDAQ higher since November’s low.
In other words, the bulls are buckling, and the bears are winning… sort of. Until the Composite actually breaks under its 50-day moving average line (purple) at 23,269 -- and really now, under the 100-day moving average line (gray) at 22,920 -- there remains a chance the index could still find a way of holding its ground long enough to make another leg higher.
NASDAQ Composite Daily Chart, with Volume and VXN
Source: TradeNavigator
Zooming out to a weekly chart of the NASDAQ Composite doesn’t quite show us anything new about the position and shape of the chart, although it does offer some more perspective on the fact that the index is very, very compressed into a the tip of an ever-narrowing range between support and resistance… something that will force the bulls of the bears to make a more meaningful commitment sooner than later. The weekly chart also reminds us the bearish MACD crossunder from November is not only still intact, but seems to be widening.
NASDAQ Composite Weekly Chart, with MACD and VXN
Source: TradeNavigator
The S&P 500 has some similarities right now, but also, some significant differences. It too is being steered into the tip of a converging wedge pattern (framed by dashed blue lines), but was actually steered into a new record high last week. Unlike the NASDAQ Composite, the S&P 500 is still finding plenty of support at all of its most important technical support lines.
S&P 500 Daily Chart, with Volume and VIX 
Source: TradeNavigator
And the weekly chart of the S&P 500 pretty much confirms everything the daily chart is telling us about the support this index is still finding. Like the NASDAQ though, the S&P 500’s weekly chart also reminds us that the index is still under the dark cloud of bearish MACD lines even though the path of least resistance here remains to the upside… up to the upper resistance line right about where the yellow arrow is pointing.
S&P 500 Weekly Chart, with MACD and VIX
Source: TradeNavigator
So what’s the call? We still contend the market needs to go through a significant correction to bleed off its steep valuation and overbought condition. Being momentum traders though, we can’t deny that the undertow is still bullish, and that the bears have yet to deal any serious blows that could be considered enough to uproot the current rally. There’s a fair amount of wiggle room, in fact, before either of the indexes risk slipping into too much trouble to easily dig themselves out of with relative ease.
There’s no denying this is a very uncomfortable bullishness though, in the shadow of more than a 40% runup just since April’s low, however. We’ll have to pay that paper at some point.