Weekly Market Outlook – Dented, But Not Derailed

Posted by jbrumley on May 31, 2024 10:23 PM

Stocks finished the week (and the month) on something of a high note, bouncing back from Friday’s intraday tumble to at least break even. Nevertheless, the holiday-shortened week was the first loser in the last six of them, making good on last Thursday’s red flag… the outside-day bearish reversal.

It’s still too soon to presume the worst. As was already noted, the market finished the week on a bullish foot. Friday’s action is a telling day since it better indicates what traders are truly thinking, since they’re stuck with -- or without -- these trades until the following Monday. In this instance they ultimately wanted to be in regardless of the risk of holding anything into the weekend.

Still, a lot of bullish showed their cards, so to speak. They’re not completely confident there’s upside ahead.

We’ll weigh it all in a moment. Let’s first look at last week’s and this week’s economic news. It was something of a mixed bag last week, leaving it unclear how quickly the Federal Reserve likely feels like it needs to move with its next interest rate cut.

Economic Data Analysis

We heard a good deal of data last week, although there are only a couple of data sets we want to plot on a chart. The first of these is home price reports from Standard & Poor’s and the FHFA.

Home Price Charts

Source: Standard & Poor’s, FHFA, TradeStation

Do note that these numbers are for March, and as such are a little dated. Something could have changed in the meantime. But, it probably didn’t. Both measures are clearly showing fresh, persistent strength again.

Just bear in mind that prices are only part of the picture. The raw number of homes being bought and sold is still relatively low, suggesting tepid demand -- probably stemming from high interest rates.

Still, consumers say they’re feeling a little optimistic. The Conference Board’s consumer confidence score inched a little higher last month. It didn’t experience a major bounce back from its lull though, and the University of Michigan’s consumer sentiment index did dish out a sizeable tumble.

Consumer Sentiment Charts

Source: University of Michigan, Conference Board, TradeStation

On balance, sentiment isn’t great. Those high interest rates may be taking more of a toll than it seems to be on the surface.

In this vein, although incomes were up again a little bit in April, wage growth is slowing down, and consumer spending growth fell well short of expectations. This slowing spending points to waning inflation, which in turn means -- again -- the Fed doesn’t have to be quite as dovish as most people seems to want it to be here.

Everything else is on the grid.

Economic Calendar

Source: Briefing.com

This week isn’t going to be a terribly busy one, but we will be getting a couple of important items. The first of these is the Institute of Supply Management’s manufacturing index data from May on Monday, followed by the services index report for last month on Wednesday. The services score has been imploding since 2021, and although economists are looking for a slight uptick for May, it won’t be enough to snap the downtrend. In the meantime, the manufacturing report should show a little bit more progress, but only a little.

ISM Manufacturing, Services Index Charts

Source: Institute of Supply Management, TradeStation

The other biggie due this week is May’s payroll growth and unemployment rate data, coming on Friday. Both of last month’s figures should be in line with April’s data, but that’s a bit of a problem simply because the unemployment rate’s been edging a bit higher, while payroll growth is slowing.

Unemployment Rate, Payroll Growth Charts

Source: Bureau of Labor Statistics, TradeStation

This report of course has the potential to really move the market, for the better or for worse. It’s worth watching here simply because it truly is an important economic barometer at this point in time.

Stock Market Index Analysis

We cautioned you a week ago that the market’s rally was showing vulnerabilities. Namely, that week’s Thursday’s bearish “outside day” showed us just how easily the market could unravel… and that a bunch of traders weren’t committed to the advance. The bulls stopped the bleeding on Friday, but the bears had already shown their cards.

They showed those cards again last week. Although no serious technical damage was done (Friday’s intraday recovery even left the S&P 500 above all its key moving average lines), the advance clearly hit a wall. When all was said and done, the S&P 500 fell 0.5% last week. That’s not a lot, but all big trends start out as small ones.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeNavigator

Here’s the daily chart of the NASDAQ Composite. It didn’t fare quite as well as the S&P 500 did on Friday, never fighting it way back into the black. As a result, the composite lost 1.1% of its value last week. Like the S&P 500 though, the NASDAQ at least fought its way back above its 20-day moving average line (blue). That’s something to build on, as is the close above the previous technical ceiling at 16,499 (white, dashed).

NASDAQ Composite Daily Chart, with VXN and Volume

Source: TradeNavigator

The weekly chart of the NASDAQ Composite may at least partially explain what’s going on here. As it shows, the index may well be bumping into the ceiling (red, dashed) created by connecting the peaks from July of last year and in March of this year. This resistance hasn’t been proven to be rock-solid just yet. But, it is on the radar.

NASDAQ Composite Weekly Chart, with MACD and Volume

Source: TradeNavigator

The trend is still bullish. In fact, the way the bulls fought back as soon as the 20-day moving average lines were tested is compelling. The only real problem here is the sheer scope of the gains seen since October of last year. The S&P 500 is still up nearly 50% from that point, which is a tough act to follow regardless of the circumstances leading up to that move. The only problem with that problem is, there’s still a great deal of technical support below that can -- and likely will -- make things tough on the bears should they decide to try to make a stand here and drive stocks lower.