Weekly Market Outlook – The Bulls Push Back… Some of Them, Anyway

The market bounced back from the previous week’s stumble last week, reaching record-high territory as a result. The bigger trend remains bullish.

There are challenges, however. The NASDAQ Composite is bumping into an important technical ceiling, while the S&P 500’s rally is unfurling on weakening volume. There’s room and reason to doubt this advance has staying power. Still, the trend is your friend…

We’ll look at the matter in some detail in a moment. Let’s first run through last week’s most important economic reports, which ended with a (mostly) encouraging jobs report for May.

Economic Data Analysis

Yes, the payroll-growth and unemployment numbers were posted on Friday, but we got some noteworthy numbers before that. On Monday we heard last month’s ISM Manufacturing Index data, followed by the ISM Services Index update on Wednesday. Services activity was up even more than expected, rolling in well above the key 50 level. Manufacturing activity, conversely, fell further below the 50 mark rather than edging slightly higher as expected.

ISM Manufacturing, Services Index Charts

Source: Institute of Supply Management, TradeStation

Either way, in both cases the bigger, underlying trends are starting to edge higher. This is a bullish sign, albeit a longer-term hint.

In any case, on Friday we heard last month’s jobs data. It was hailed as a decisive victory, with 272,000 new jobs being created versus expectations of only 190,000. That’s a firm improvement on April’s growth of 165,000 new payrolls. But, thanks to a shrinking labor force, a slight decrease in the number of people actually working, and growth in the number of people who are officially unemployed, the unemployment rate actually inched up to a two-year high of 4.0%.

Unemployment Rate, Payroll Growth Charts

Source: Bureau of Labor Statistics, TradeStation

Like it or not, there’s at least just as much bad news in this jobs report as there is good news. There is an upside to this, however… sort of. It suggests the economy is slowly cooling, which could held dial back inflationary pressure. The bad news is, this means the Federal Reserve doesn’t need to be in any particular hurry to lower interest rates.

Everything else is on the grid.

Economic Calendar

Source: Briefing.com

Speaking of interest rates, the FOMC has a scheduled opportunity to lower interest rates on Wednesday of this week. But, there’s a 98% chance the Fed won’t do so. Traders are betting there won’t be any serious consideration of a rate cut until September, and even then there’s only a 50/50 chance of one.

There is a large batch of news due this week that will at least somewhat impact the Federal Reserve’s thinking. That’s inflation. Consumer inflation data will be reported on Wednesday, while producer inflation numbers will be posted on Thursday. It’s been a mixed bag of late, but it’s certainly clear that inflation is no longer falling. Producer inflation, in fact, is perking up again. There should be a little relief this time around, but only a little.

Inflation Rate Charts

Source: Bureau of Labor Statistics, TradeStation

Just bear in mind that these inflation figures for May aren’t going to be known by the Fed’s governors until after they’ve made the decision. Also remember the FOMC is more interested in consumer spending and income levels anyway when it comes to making the call on interest rates. These numbers won’t be out for a couple more weeks.

Stock Market Index Analysis

Kudos to the bulls. They could have folded following the prior week’s setback. But, they rose to the occasion, pushing back to drive the market to record levels. The NASDAQ Composite gained nearly 2.4% last week, while the S&P 500 rallied 1.2%.

We’ll start this week’s looks with a look at the weekly chart of the S&P 500. The highlight here of course is the move back above a previous ceiling at 5,263 (white, dashed). But, the chief detail we want to note here is the 5,655 level (green, dashed). That’s the target based on the cup-and-handle breakout that materialized back in December. The span of these moves is often about the same distance between the bottom -- or low -- of the cup and the cup’s brim line. In this case that’s a little over 1,000 points, which should ultimately carry the S&P 500 near the 5,655 mark. (We hadn’t been talking about this much of late largely because there was doubt about the market making good on the pattern. Now this possibility is back on the radar.)

S&P 500 Weekly Chart, with VIX and Volume

Source: TradeNavigator

It’s still a little too soon to blindly cheer, however.

Take a look at the daily chart. The bulk of the S&P 500’s gain last week took shape on Wednesday. As the weekend approached, the buyers balked. It’s a subtle sign that traders aren’t completely confident the current rally effort’s actually got legs. Underscoring this red flag is the fact that volume continues to fade as the market continues to climb.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeNavigator

Adding to the concern here is something unique to the NASDAQ Composite. Thanks to last week’s sizeable gain, the index is now bumping into a well-established technical ceiling (red, dashed) that connects all the major highs since August of last year. If the bears are going to make a stand, this is an ideal place to do so.

NASDAQ Composite Weekly Chart, with MACD and Volume

Source: TradeNavigator

And like the S&P 500, the NASDAQ was fading later in the week after Wednesday’s romp. Also like the S&P 500, the NASDAQ’s buying volume continues to fade as the rally marches on. More and more people are dropping out the more expensive -- and more overextended -- stocks are getting.

NASDAQ Composite Daily Chart, with VXN and Volume

Source: TradeNavigator

Despite all the concerns, however, the indexes are still moving forward, and are still above all of their key moving average lines (all of which are also sloped upward). In that the trend is your friend until it clearly isn’t, stay bullish here. Just keep a close eye on… well, everything. The S&P 500 is now up 30% from October’s low. That’s a lot of ground to cover in a fairly short period of timing, leaving stocks vulnerable to profit-taking.