Weekly Market Outlook – Last Week’s Big Selloff Comes With An Important Footnote

With nothing more than a passing glance at last week’s losses it would be easy to conclude the worst about the market’s foreseeable future. Not only did the S&P 500 log its worst week in a month, the NASDAQ Composite closed below a key technical support level.

And yet, it’s still too soon to presume the worst. There’s a good reason stocks continued to plunge on Friday, and at the same time, the selloff’s momentum is in question. The three-day loss was also so big it may have already set up a bounceback effort.

We’ll look at the action in detail below. First, let’s look at last week’s major economic announcements and preview what’s in the lineup this week.

Economic Data Analysis

It was quite a busy week!

The party started on Tuesday with last month’s retail sales. They were up, and by more than expected. That’s true with or without automobiles in the mix. In fact, on an annualized and adjusted basis, September’s retail spending reached record levels. Inflation helped get spending levels there. Nevertheless, retail consumerism is clearly accelerating here. People are doing their part.

Retail Sales Charts

Source: Census Bureau, TradeStation

We also heard about last month’s factory activity on Tuesday. Capacity utilization ticked a little higher again, while industrial production climbed to a new multi-month high. Both measures suggest the economy is growing.

Industrial Production and Capacity Utilization Charts

Source: Federal Reserve, TradeStation

Real estate remains a bit of a sore spot. While last month’s new starts ticked a little higher, September’s pace of 1.36 million (annualized) is still pretty low. Meanwhile, permits actually fell from August’s levels, and are also leveling off at below-average levels.

Housing Starts and Building Permits Charts

Source: Census Bureau, TradeStation

In the same vein, last month’s sales of existing homes (which makes up the vast majority of all home sales) fell more or less in line with expectations. But, those expectations were low. Existing home sales also reached multi-year low levels.

New, Existing Home Sales Charts

Source: National Association of Realtors, Census Bureau, TradeStation

New home sales numbers for September will be released on Wednesday of this week. Economists are looking for a slight improvement on August’s numbers, but those numbers are pretty low. Also bear in mind that with starts and permits being as weak as they are, there’s not a lot of opportunity for new home sales to move meaningfully higher.

Everything else is on the grid.

Economic Calendar

Source: Briefing.com

While home sales are weak, that hasn’t yet proven a problem for home prices – the houses that are selling continue to sell at lofty levels. Analysts believe prices improved again in August.

Home Price Charts

Source: Standard & Poor’s, FHFA, TradeStation

It’s unusual, but the FHFA’s home price index won’t be posted until Tuesday of next week. As you can see though, it too continues to push upward.

Finally, we’ll hear the third and final look at the University of Michigan’s measure of consumer sentiment for October on Friday. It’s apt to have fallen again, and quite dramatically at that! Curiously, although consumers are spending, they’re worried about the foreseeable future. This can’t remain the case indefinitely.

Consumer Sentiment Charts

Source: Standard & Poor’s, FHFA, TradeStation

The Conference Board’s consumer confidence score for this month is due on Tuesday of next week. Same story.

Stock Market Index Analysis

Yes, last week’s rout broke some critical technical support. There are also still some support lines left intact. In fact, the sheer scope of the selloff sets up what could be a dead-cat bounce this week. That might turn into something longer-term.

With the move below such important support levels though, things may have taken a bigger turn for the worse.

We’ll start with a look at the daily chart of the S&P 500. It’s big breakdown was the close under the 200-day moving average line (green) at 4232… the first time the index has been under this long-term indicator since March.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeNavigator

It’s not the end of the world. As was noted, last week’s 2.4% tumble invites a big buyback this week. Also bear in mind that Friday was an option expiration day, which may have exaggerated if not outright caused all this selling (that’s not unusual when traders don’t know what to think). Never say never.

Nevertheless, a lot of cracks are starting to show. As the weekly chart of the S&P 500 below illustrates, last week’s steep selling also dragged the index below the straight-line support that had connected all the key lows going back to last October.

S&P 500 Weekly Chart, with VIX and Volume

Source: TradeNavigator

The NASDAQ Composite is doing slightly better, but only slightly. Last week’s close at the low didn’t pull it below the late-September low. Traders might be making a stand there.

NASDAQ Composite Daily Chart, with VXN and Volume

Source: TradeNavigator

Even so, the NASDAQ is still breaking down in another key way. Like the S&P 500. The composite fell below the straight-line support that had connected all the major lows since December of last year. With that floor in the rearview mirror, it becomes easier for the sellers to keep driving the index lower.

NASDAQ Composite Weekly Chart, with VXN and Volume

Source: TradeNavigator

Also notice the NASDAQ’s volatility index (VXN) is now pushing well past its recent horizontal ceiling near 23.3. That’s bearish too. It’s possible this thrust is due to all the options trading activity seen late last week due to expiration on Friday. Even if that is the case, however, the market must pick up where it left off last week. That’s on the defensive.

Things could go either way from here to start the week. If we start out moving higher though, don’t be too quick to trust that move. There are a lot of ways that effort could end sooner than later, rekindling the bigger-picture correction that’s been underway since August.

The good news either way is, the next leg of any selling should be the last one before easing into the usual year-end bullishness… which tends to begin in the earlier part of November. That may have much to do with elections, and the certainty that ensues once they’re complete.