Weekly Market Outlook - Not Your Usual Santa Claus Rally

One would think between the usual Santa Claus rally leading up to Christmas Day and the official enactment of lower tax rates, the market would have been roaring last week. One would have been wrong, however. Stocks finished slightly higher last week, but only because of a rather bullish Monday. Past that, traders weren't overly excited.

Part of that stems from the sheer distraction of the holiday, though one also has to acknowledge that, being up 19% year-to-date, most of any bullishness surrounding the market in general and the tax cuts specifically are already baked into stock prices. There's a reason "buy the rumor, sell the news" is a cliche.

Then again, it's not like the bigger uptrend is broken.

We'll handicap the rally below -- as always -- but first let's recap last week's big economic announcement and preview this week's announcements.  

Economic Data

It was a busy week last week to be sure, particularly for real estate.

The ball got rolling on Tuesday with last month's housing starts and building permits report, both of which were pretty strong for a November, and both of which were  little better than expected.

Housing Starts and Building Permits Charts

Source: Thomson Reuters Eikon

Home sales were also wildly, stupidly strong. New-home sales rolled in at a stunning pace of 733,000, while existing-home sales raced to a pace of 5.81 million.

New and Existing Home Sales, Inventory Charts

Source: Thomson Reuters Eikon

It's not clear if the heating-up economy was the prod, or fear of rising rates. Maybe it was the uncertainty of the new tax laws that drew people into purchasing a home, or maybe it was a combination of all three. Whatever it was, odds are good it wasn't a one-offer event. We're looking for more progress like this in 2018, limited only by a lack of inventory of houses for sale.

Note that the NAHB Housing Market Index and the FHFA Housing Price Index were also both strong, and better than expected.

You probably also saw/heard the third and final reading for Q3's GDP growth rate. The 3.2% clip is pretty good.

Everything else is on the grid.

Economic Calendar

Source: Briefing.com

This week won't be as busy, which is good since the trading week has been shortened by a day.

One of the biggies will be Wednesday's consumer confidence reading from the Conference Board, which follows last week's third (and final) consumer sentiment reading from the University of Michigan. The pros are expecting a slight lull from the multi-year record high reading from November, but even if it move lower, consumers -- employees, consumers and spenders -- are still stoked.

Consumer Sentiment Charts

Source: Thomson Reuters Eikon

Also keep an eye out for Thursday's crude oil and natural gas inventory report. Crude stockpiles have been falling sharply for a while now, shrugging off the impact of September's hurricanes and resuming a downtrend spurred by the shuttering of much of the nation's production capacity. It just took months for that capacity to translates into a real supply cut. The ball is rolling now, though, which bodes well for the price of oil. (And crude prices have been on the rise in step with shrinking stockpiles.)

Crude Oil and Natural Gas Stockpile Charts

Source: Thomson Reuters Eikon

Index Analysis

Like last week, let's start this week with a look at the weekly chart of the S&P 500, just to put things in perspective. In this timeframe we can see just how long the rally has persisted without any sort of decent interruption. It's been record-breaking, in fact. The S&P 500 has rallied for a record-breaking 418 days without a 3% correction, topping the previous record set in 1995.

It's been fun to watch, and rewarding. It's also tough to imagine it lasting much longer though. The 28% rally since early November of last year has left the market in a precarious position where would-be profit-takers start to get nervous. The S&P 500 is now 8.1% above its 200-day moving average line (green), which is more than a little bit above its usual maximum degree of divergence.

S&P 500 Weekly Chart, with VIX and Volume

Source: TradeNavigator

Other red flags on the weekly chart: There's not a great deal of volume behind the last few weeks of the bullish effort, the VIX remains dangerously low, and with the tax cuts now in place, the aforementioned "sell the news" outcome is a distinct possibility. Also bear in mind that even by "bullish year" standards, 2017's gain has been above average, setting the stage for profit-taking sometime in the foreseeable future.

S&P 500 Performance YTD, vs. Avg. Year and Avg. Bullish Year

Source: TradeNavigator

Zooming into a daily chart of the S&P 500 doesn't help us much, other than to point out the rally is starting to struggle as it moves deeper into record-high territory.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeNavigator

A look at the daily version of the NASDAQ Composite doesn't help us much either.

NASDAQ Composite Weekly Chart, with VXN and Volume

Source: TradeNavigator

For better or worse, the lack of technical relevancy of any of the above charts is irrelevant, only because we're at a time of year that's driven more by the calendar and sentiment and less by fundamentals or technical reason. This coming week should be bullish, given the market's history. Then again, the market is already well ahead of the norm for the year so far, and it certainly seems like any premiums merited by economic optimism seems built-into current stock prices.

We have to assume the trend in place will remain in motion, as poorly supported as it is. We'll wait for both key indices to break below their lower Bollinger bands before assuming any weakness will develop into something serious. Anything less, and we'll assume it's just nothing more than the same uneventful volatility we've seen for months now.

Make no mistake though. The risk of a fairly major correction is in the air, even if it isn't realized until well into next year. The S&P 500 is now trading at a trailing P/E of 22.2 and a forward-looking one of 19.0. Both are well above the norm, and are assuming an strong economic/earnings explosion is a foregone conclusion.