Weekly Market Outlook – Hangin’ by a Thread… Again
Despite Friday’s best efforts from the bulls, the market just wasn’t able to unwind the damage done earlier in the week. Even if the economy appears to be doing “OK,” stocks as a whole are now is some pretty serious trouble… almost. There are a couple of final straws to put in place before the weight of the brewing correction effort just becomes too much to bear.
The good news is, the lines in the sand are crystal clear.
We’ll look at them in detail in a moment. First, let’s review last week’s economic reports and preview what’s coming this week.
Economic Data Analysis
It was a busy week indeed, starting in earnest on Tuesday with December’s retail sales data. It wasn’t great. Retail spending was essentially flat, suggesting consumers are feeling some more serious financial pain than first believed, ultimately leading one to wonder if the economy needs more immediate help in the form of an interest rate cut that wasn’t exactly on the near-term radar.
Retail Sales Charts
Source: Census Bureau, TradeStation
That thought was retracted a bit on Wednesday, however, with a January jobs report that was much better than expected. The U.S. economy added 130,000 new jobs versus expectations of only 55,000 which was enough to dial the unemployment rate back down from 4.4% to 4.3%.
Unemployment Rate, Payroll Growth Charts
Source: Conference Board, University of Michigan, TradeStation
The number of officially unemployed people fell by 141,000, despite headlines of sweeping layoffs, once again raising the question of whether or not we actually need lower interest rates from here.
The thing is, maybe we do. That’s the general take-away from Thursday’s report on sales of existing homes. Economists expected them to peel back a little from December’s annualized pace of 4.27 million, but they fell quite a bit more, to 3.91 million.
Home Sales Charts
Source: Census Bureau, Natl. Assn. of Realtors, TradeStation
The next look at new home sales (for November and December) is coming on Friday of this week. Analysts are calling for about the same pace as we saw in October, which was better than the recent average, but hardly enough yet to call “growth.”
Finally, on Friday we got January’s inflation numbers. As expected, price increases continue to cool off. This makes it much easier for the Federal Reserve to justify the aforementioned interest rate cuts that have been on the radar for some time now.
Consumer, Producer Inflation Charts
Source: Census Bureau, Natl. Assn. of Realtors, TradeStation
We haven’t yet heard January’s producer inflation data; it’s coming in late February. Given what we’ve seen here, however, it’s likely producers’ costs are being tamed reasonably well too.
Everything else is on the grid.
Economic Data Report Calendar
Source: Briefing.com, TradeStation
In addition to new homes sales, on Wednesday of this week we’ll hear November’s and December’s housing starts and building permits. Forecasts we won’t see much change with either, which isn’t encouraging in that the recent figures haven’t been all that great.
Housing Starts, Building Permits Charts
Source: Census Bureau, TradeStation
Also on Wednesday look for last month’s industrial production output and utilization of the nation’s factories’ capacity. Economists are calling for a slight improvement of both, but notably, even a slight improvement will extend growth trends for each. The domestic economy is firming up here.
Industrial Production, Capacity Utilization Charts
Source: Census Bureau, TradeStation
Also keep your eyes and ears open on Friday for December’s personal income and personal spending report, which plays a role in the Fed’s decision on any interest rate cuts.
Stock Market Index Analysis
We begin this week with a look at the daily chart of the S&P 500 mostly just to illustrate that while the market is on the verge of a technical breakdown, it’s not past the point of no return quite yet. Although the index just-barely closed under a long-term straight-lie support level (purple, dashed), the 100-day moving average line (gray) at 6,818 is clearly providing some degree of support. Whether or not it holds up remains to be seen. But, this is the make-or-break mark for the S&P 500.
S&P 500 Daily Chart, with Volume and VIX 
Source: TradeNavigator
Here’s the weekly chart of the S&P 500 to put last week’s action in a bit more perspective. It was the worst week after several weeks of stagnation, but there’s clearly some support around 6,818.
S&P 500 Weekly Chart, with MACD and VIX
Source: TradeNavigator
Both charts above show us something that’s worth drawing out here, particularly in light of the fact that the S&P 500 is testing well-established support. That’s the fact that the volatility index (or VIX) is once again testing a corresponding technical ceiling right around 24.0. If-and-when that fails as resistance at the same time the S&P 500 stops finding support at its 100-day moving average line, it could open the proverbial floodgates.
And for what it’s worth, the NASDAQ Composite has already broken under its nearest import floor, after repeatedly bumping into horizontal resistance around 23,820. Notice the NASDAQ’s volatility index (the VXN) is also testing an established technical ceiling around 28.0.
NASDAQ Composite Weekly Chart, with MACD and VXN
Source: TradeNavigator
What we really want to hone in on with the NASDAQ Composite, however, is the way its 20-day (blue), 50-day (purple), and 100-day (gray) moving average lines are all about to converge as their bullish divergence first seen early last year unwinds (circled in orange). The 20-day line is already below the 50-day line, in fact, and as one or both of the other falls under the 100-day moving average line, it will confirm a sweeping loss of momentum. It will also likely trigger some bearish algorithm trades, while at the same time simply spook a bunch of traders who keep tabs on these sorts of details.
NASDAQ Composite Daily Chart, with Volume and VXN
Source: TradeNavigator
The bulls obviously still have a narrow path out of more serious trouble here. However, it’s going to take a lot of look and some crystal-clear bullish economic news to sidestep a correction that’s now long overdue. One or two more bad day should be all that’s needed to get that bearish ball rolling.
We’ll talk downside targets when-and-if the need arises, although it’s worth pointing out now that in both cases above the indexes’ nearby 200-day moving average lines (green) are one of the first checkpoint targets.