Weekly Market Outlook – You Can't Fight the Tape

It took a little while to decide, but after thinking about it for a day, traders finally decided to get (back) on the bullish bandwagon. The S&P 500 gained another 1.2% last week to mark the third weekly win in a row. It’s also now deep into record-high territory, defying the calendar as well as the fact that valuations have reached wild levels. Never even mind the fact that stocks are so technically overbought here.

This could be considered a meltup. And the tricky part about meltups is, you never really know and where they’re going to end. There’s certain room for stocks to keep moving higher from here, however, as unusual is it might be to rally 38% in less than six months without anything even sort of like a correction.

We’ll dissect all the technical unlikelihoods and odds in a moment. Let’s first look at last week’s economic reports.

Economic Data Analysis

Last week’s big news was of course the Federal Reserve’s decision to cut the Fed Funds rate by one-quarter of a point, but it wasn’t the only noteworthy economic news from last week to digest. On Tuesday, for instance, we heard about August’s retail sales. Retail spending has been trending higher at a consistent even if modest pace. That didn’t change this time around. At least consumers are doing their part to keep the economy moving forward.

Retail Sales Charts

Source: Census Bureau, TradeStation

Also on Tuesday we heard last month’s capacity utilization and industrial production figures. Economists weren’t expecting much change from July’s lackluster levels, and that’s exactly what we got. The problem is, that’s still a problem. Industrial output is stagnating at current levels, and the use of the nation’s factory capacity continues to broadly dwindle. It’s unusual for this to be the case and also see corporate profits continue rising for very long.

Industrial Production, Capacity Utilization Charts

Source: Federal Reserve, TradeStation

And as could have been expected given the current condition of the real estate market, housing starts as well as building permits both fell in August, and both rolled in measurably lower than expected. And permits are plunging, reaching another multiyear low last month. Real estate’s woes are undeniable now. It’s just a question of how much ripple effect it will have on the rest of the economy.

Housing Starts, Building Permits Charts

Source: Census Bureau, TradeStation

The biggie from last week of course was Wednesday’s rate cut decision, and the acknowledgement that more may be on the way. Investors weren’t quite sure what to initially make of the language, trying to decide if the move was a warning of economic headwinds or a reason to expect bullishness. When all was said and done, traders chose bullishness.

Everything else is on the grid.

Economic Data Report Calendar

Source: Briefing.com, TradeStation

Real estate’s current headwind may be confirmed this week, with Wednesday’s look at last month’s sales of new homes, followed by August’s sales of existing homes on Thursday. Forecasts are calling for slight declines of both, although those declines would be from already-low levels.

New, Existing Home Sales Charts

Source: Bureau of Labor Statistics, TradeStation

Look for the Conference Board’s measure of consumer confidence on Friday. It’s likely to roll in at August’s levels again, although the bigger trend is still suggesting broad deterioration.

Consumer Sentiment Charts

Source: Conference Board, University of Michigan, TradeStation

The University of Michigan’s third and final sentiment figure for September is coming next week.

Also note that on Friday we’ll hear last month’s consumer spending and personal income data for last month (which plays a big role in the Fed’s decisions regarding interest rates). Both pieces of data have confirmed economic strength, and are expected to do the same again this time around.

Stock Market Index Analysis

Buckle up. There’s a lot to talk about this week.

Let’s start with a look at the weekly chart of the S&P 500 simply because it’s important to paint the picture with the bigger, broad brush strokes first. From this vantage point we can that was previously a support line that turned into a resistance line (yellow, dashed) is no longer resistance. The index hurdled it last week (see the red circle). Notice there’s nothing else to stand in its way now.

S&P 500 Weekly Chart, with MACD and VIX

Source: TradeNavigator

It’s really kind of wild when you take a step back and think about it. The S&P 500 is now up 38% in less than half a year, and is still going at a time of year that’s typically bearish. That said, while the odds of bearishness are high here, when the market isn’t falling in September, it’s often racing higher.

Still, while the momentum is bullish and there’s room to run, the risk of a sizeable pullback is still uncomfortable.

Just don’t count on necessarily seeing one soon. Although it’s possible, the shape of last week’s bars bought just enough time to let the bulls keep going.

Wednesday is the key. Although the FOMC’s decision gets 100% of the credit, the shape of the bar (highlighted in yellow) where the open and close were right in the middle of the daily bar -- a doji -- indicates a pivot (albeit a small one) and a reset of traders’ mindsets. In this instance the bears had a chance to finally turn the tide, and after thinking about it for a bit, they didn’t. The ceded control back to the bulls, restarting the clock, so to speak.

S&P 500 Daily Chart, with Volume and VIX

Source: TradeNavigator

The NASDAQ Composite appears to be in a similar situation, although not identical.

As the composite’s weekly chart shows us, the breakout thrust from two weeks back saw follow-through last week, yet there’s still room before bumping into the technical ceiling that connects all the key highs going back to 2023 (red, dashed). That resistance is currently around 23,400 (marked in red), and rising. At the very least you can expect to see the bears try to push back there.

NASDAQ Composite Weekly Chart, with MACD and VXN

Source: TradeNavigator

And it might even happen sooner than that, if it’s not already happening. As the daily chart of the NASDAQ Composite illustrates, after Wednesday’s bullish hammer-shaped bar, the index stopped rallying when it ran into a near-term resistance line (yellow, dashed) that connects the key peaks since late-July.

NASDAQ Composite Daily Chart, with Volume and VXN

Source: TradeNavigator

So what do we do with all of this conflicting perspective? Good question. The calendar and sheer scope of the rally since mid-April still weighs on everything here, even if the momentum is technically bullish. This of course only makes stocks even more ridiculously expensive, and leaving them all the more vulnerable to a pullback.

Nevertheless, even if the market stumbles from all the weight it’s carrying, it’s also shown us that it’s not willing to give up too much ground. We’re seemingly in an environment where good news is good, and bad news is good since it will inspire dovishness from the Federal Reserve. That’s why we’re counting on a quick recovery in the event of any selling, which will very likely start with a pullback to one or any of the shorter-term moving average lines.

In other words, at this point it’s the bears that will have to prove themselves that a selloff is taking shape. It will take the failure of several moving average lines to be convincing. Barring that, we have to lean bullishly and buy when any pullback seems to be stabilizing and reversing. A firm thrust from the volatility indices will help send that message.

And yes, given the backdrop, this is crazy. You just can’t afford to fight the tape… not until it’s crystal clear the tape is finally moving in the other direction.