Surprising Sectors in a Stretched Market - Weekly Market Outlook

Posted by Price Headley on January 29, 2012 8:57 PM

A lot of noise this past week, but when it was all said and done, it didn't mean much... the market ended basically flat with the prior week.  Does all this tractionless effort finally mean the rally's over (at least for a while)?  Could be, but the bears still haven't dealt a decisive blow yet.

We'll look at what it's going to take to push stocks over the edge in a second.  First we want take a top-down look at things, beginning with the economy.

Economic Calendar

A pretty busy week last week, particularly on the real estate front - pending home sales fell 3.5% in December, while new home sales fell from an annualized rate of 314K to 307K.  Part of that can be chalked up to seasonality effects, but part of it can't.

As for unemployment, new claims rose to 377K (from 356), and continuing claims moved up from 3.466 million to 3.554 million.  Though both were higher, both trends are still broadly pointed lower.

The big news was Q4's GDP growth rate; the economy grew by an annualized rate of 2.8% last quarter.  For the year the overall growth rate was only 1.6%, which is weak by all standards, yet better than most were expecting around the middle of the year.  Perhaps more important though, is the current trend.  Fourth quarter was the third straight quarter the GDP rate improved, making it tough to argue that the economy is slowing down.  The data says it is accelerating.

Economic Calendar

The coming week is going to be nothing less than crazy - we've got 26 major economic data items in the lineup, with most of it being important.  We'll limit our look to the most important of them.

The big ones begin on Monday, with personal income and personal spending.  Both were up 0.1% in November, but incomes are expected to be 0.4% better for December, while spending is forecasted to have only grown another 0.1%.

Tuesday's Consumer Confidence should be noted too.  The pros say it's on pace to rise from 64.5 to 67, mirroring last week's increase in the Michigan Sentiment Index score.  It will be the fourth straight increase if it rolls in as expected, and close to the multi-year high levels we saw in the earliest part of 2011.  Again, it is completely at odds with recent pessimistic assumptions.

The fireworks really begin late in the week though, when we get the next batch of employment numbers.  Payroll (jobs) numbers are expected to be positive again, but not as strong as December's growth.  The government says private payroll numbers will increase by 145K (versus a 212K increase in December), while ADP is looking for 175K new jobs to be created last month (versus 325K in December).  Still, the unemployment rate isn't expected to budge from 8.5%. 

S&P 500

The good news is, the S&P 500 Index (SPX) (SPY) is still moving up within the confines of that bullish channel we plotted a couple of weeks ago [see the orange lines on our chart below].  As long as the support side of that channel holds up, the bulls are ok.  Simultaneously, the bulls are getting a boost from the fact that the VIX (VXX) (VXZ) is still pressing downward, into its lower Bollinger band.

Yet, there's still something not quite right about the rally effort in its current state.

We've mentioned the SPX's upper Bollinger band before as a ceiling.  And it was still ceiling this past week as well, as the index bumped into it on Thursday and peeled back without much hesitation.  However, given that the upper band was still rising and the market's broad trend remained a bullish one, it wasn't a problem - the upper Bollinger band was simply a guidepost.

Now, however, things have changed in that regard.  As of last week, the upper Bollinger band is no longer sloped upward. Instead, it's flattened out - a precursor starting to point lower.  It's still too soon to say it's insurmountable, but it's not a step in the right direction.

Nevertheless, the line in the sand we really want to keep an eye on is that lower edge of the rising channel.  It was at 1311 as of Friday, and inches a little higher each day.  If and when it snaps, that'll be the first real sign of trouble in a long time.

SPX & VIX- Daily

Just for a little more perspective, take a look at the weekly chart - same parameters, same settings . The bullish channel is still clear, and the upper Bollinger band is still starting to flatten out.  That's not any different than the view of the daily chart.  It's with the weekly chart, however, that we can see something alarming that we haven't seen in a long, long time.... indecision.

Last week's bar is called a doji, where the open and close are essentially at the same level (1316), and that close is pretty much in the middle the week's high-to-low range.  Generally speaking, it's a sign of indecision, and frequently a sign of a reversal.  To see one materialize after a six week, 8.0% runup only bolsters the likelihood of a reversal. 

Again, it's not unraveling yet.  And the weekly chart itself looks a little less vulnerable than the daily chart does, as there's a little more room for the market to keep rising while the VIX keeps falling.  So, from a trend-watching perspective we have to remain on the bullish side of the fence.  But, this rally is getting stretched very thin here.

SPX & VIX - Weekly

Sector Performance

It's been a while since we looked at relative sector performance, largely because there was no reason to - they were all equally hot and cold between August and December.  Now though, we're starting to see some real (and persistent) leadership emerge.  That leadership, however, is coming from unexpected places.

Ok, the strength of the basic materials (XLB) sector isn't a total surprise.  The economy is still clearly chugging along (see the economic update above), and even the recent lowering of the inflation rate still leaves it at 'inflationary' levels.  So, we can count on more of the same from the materials group.  The other two emerging leaders, however - gold (GLD) and real estate (XHB) (VNQ) - may be surprises.

For gold, the surprise comes in the form of a complete turnaround from a December implosion.  The buyers have been too persistent since January to just chalk it up to volatility though.

As for real estate (REITS), it's not a turnaround of anything.  Rather, real estate has just cranking out progress for weeks now, and the fruits of that consistent labor are finally starting to be recognized.

Sector Performance since November 25th, 2011

Just as a reminder, the relative sector performance analysis is an ongoing thing - not a one-time snapshot to embrace and cling to until further notice.  There was just a little point in looking at it until recently.  Now that leaders and laggards are emerging though, we'll start taking this look on a regular basis.

Trade Well,

Price Headley