Weekly Market Outlook – The Damage is (Mostly) Done. The Fallout May Be Inevitable.
Most everyone had a feeling something like this was apt to happen sooner or later. Now it’s happening. The S&P 500 fell another 1.6% last week, closing at its worst weekly close since mid-November, and more than 5% below its December/January peak. Now that the bears got the ball rolling, it’s going to be tough to stop it anytime. This long-overdue correction is very likely going to have to fully play itself out now.
That still doesn’t necessarily mean plan for a new bear market though. Quite the opposite, actually. We still contend any serious selloff is ultimately a buying opportunity. Hopefully, we’ll even get some of the tell-tale signs that a bottom is in at the time it’s being made. We’ll discuss those closer to such a likely event though. Let’s first talk about what happened last week, what still needs to happen from here, what the week ahead is likely to hold, and downside targets.
Before we get into any of that, however, let’s run through last week’s economic reports and preview what’s coming this week.
Economic Data Analysis
The most important numbers from last week were all posted later in the week, but there were a couple of important items delivered earlier in the week. One of them was Tuesday’s look at February’s sales of existing homes. They ticked higher rather than falling the little bit that economists were expecting. They’re still tepid overall though, and certainly not suggesting there’s any real demand at current prices… or interest from would-be sellers either. Existing homes for sale also remain relatively low.
New, Existing Home Sales Charts
Source: National Assn. of Realtors, Census Bureau, TradeStation
We should be able to get at least some better handle on the matter this week, on Thursday, when January’s new-home sales numbers will be posted. As the chart above illustrates, demand surged a bit in August, and has held on reasonably well (maybe because new homes are now cheaper than existing houses). That said, know that forecasts are calling for a continued drift lower.
In this vein, the Census Bureau’s measure of housing starts and building permits for February is due on Thursday. Starts should edge higher, while permits are likely to sink just a bit. But, neither are expected to move much either way. This is why we don’t want to read too much into any seemingly-bullish hints that new-home sales are on the cusp of a recovery. They (mostly) can’t be just because they’re not available to be sold.
Housing Starts, Building Permits Charts
Source: Census Bureau, TradeStation
Finally, although last month’s consumer inflation numbers were reported on Wednesday, we’d rather discuss them below when we preview the producer inflation data coming on Wednesday of this week when we’re also getting a decision regarding interest rates from the Federal Reserve. On that note though, consumer spending is still healthy, holding at December’s growth rates despite what’s supposed to be a shaky economic backdrop. This doesn’t exactly help the argument for lower rates, although it doesn’t necessarily undermine it either.
Everything else is on the grid.
Economic Data Report Calendar
Source: Briefing.com, TradeStation
This week’s action starts right out of the gate, with a look at last month’s industrial productivity and utilization of the nation’s industrial production capacity. You can see that both have been on the mend despite the pessimistic rhetoric. Although forecasts say February’s figures will roughly be the same as Janaury’s, the bigger-picture trend here is still a positive one.
Capacity Utilization, Industrial Production Charts
Source: Federal Reserve, TradeStation
This week’s biggest day, of course, will be Wednesday, when we’re due for a decision from the Federal Reserve regarding interest rates. That morning, however, we’ll also hear last month’s producer inflation data. It’s likely to move about as much as February’s consumer inflation did, which isn’t much at all. As the chart below shows us, the inflation beast has been tamed all around. There is some room for the FOMC to lower interest rates.
Consumer, Producer Inflation Charts
Source: Bureau of Labor Statistics, TradeStation
On that note, know that the market’s quite confident that we won’t be seeing any interest rate cut this time around. It’s unlikely we’ll see even the possibility of a rate cut until the latter half of this year, and even the odds are against it until December. It’s unlikely the Q1’s lackluster GDO figure is reason enough yet to accelerate the next cut’s timeline.
Stock Market Index Analysis
Lingering on the cliff’s edge for just a little too long, the market finally slipped last week. Headlines about the conflict in the Middle East are getting much of the blame, but they’re more of a catalyst than a cause. This stumble was going to happen sooner or later. The news just made it happen now.
Either way, we’re left with what we’re left with. And what is that? A reasonably convincing technical breakdown… at least for the NASDAQ Composite. As the daily chart below shows us, while it took until the very end of the week to do it, the index finally closed below its 200-day moving average line (green) at 22,158. This is a major red flag.
NASDAQ Composite Daily Chart, with Volume and VXN
Source: TradeNavigator
Even so, it’s curious – anted noteworthy – that the composite appears to be finding support at something of a horizontal technical support level at 22,043 (red, dashed). Simultaneously, the NASDAQ’s volatility index (VXN) appears to be bumping into horizontal technical resistance at 28.8 (yellow, dashed).
This all makes some sense. The market may be due for a more serious correction, but the bulls are going to make their stand and fight back at the most opportune points. That’s where the selling finally stopped on Friday (with the VXN cooperating). Just don’t read too much into this action. We’ll probably be some bullish pushback from here, but it won’t necessarily be anything more than a breather for the bears. The market’s bigger trend remains bearish.
The S&P 500’s daily chart tells the same basic story, but with one noteworthy exception. That is, it stopped just short of crossing under its 200-day moving average line (green) at 6,606. That doesn’t mean it still can’t or won’t though. Either way, we’ve still got a feeling the bulls are going to try and push back some early this week, particularly now that the S&P 500’s volatility index (VIX) appears to be bumping into a ceiling at 28.
S&P 500 Daily Chart, with Volume and VIX 
Source: TradeNavigator
Again though, don’t read too much into that bullish pushback effort. The S&P 500 would need to fight its way back above the 6,840 -- where the 20-day and 100-day moving average lines converged last week -- before we can seriously entertain the possibility of a lasting recovery now that this much damage has been done. Even with some rebound effort from here, we’re still ultimately expecting this stumble to follow all the way through to it natural end.
And where might that be? It’s difficult to say without a previous contentious floor (or ceiling) nearby. The Fibonacci retracements between last April’s low and January’s high, how, say the NASDAQ’s got a natural support floor around 21,756 already waiting for it, while the more important 38.2% Fibonacci retracement line indicates the 20,405 level could be a major bottom. That would be about 15% below the composite’s recent high, which is a good, typical corrective move.
NASDAQ Composite Weekly Chart, with MACD and VXN
Source: TradeNavigator
And for what it’s worth, here’s a (very) zoomed-out weekly chart the S&P 500. The only noteworthy nuance here is that the S&P 500’s volatility index (VIX) appears to have race to what’s been a peak in the past before… all the way back in 2022, at 36 (light blue, dashed).
S&P 500 Weekly Chart, with MACD and VIX
Source: TradeNavigator
Just don’t be too quick to conclude a bottom has already been made based on the VIX’s encounter with a known ceiling though. As 2022 showed us, the volatility index can repeatably bump into established resistance, with the market still falling to lower lows every time it happens.
Mostly though, we don’t think the S&P 500’s bottom has been made yet just because nothing about the recent shape of the chart or its bars here is consist with a low that precedes a recovery.
Bottom line? Don’t be surprised to see a bounce early this week. Just don’t read too much into it. Conversely, a bearish start right out of the gate may still prompt some bullish pushback in the near future. Even then though, now that the tide has fully taken a turn for the worst, the bears are likely to follow all the way through one way or another.