Weekly Market Outlook – Friday’s Intraday Rebound Effort Doesn’t Mean a Whole Lot

Stocks took one on the chin for a third week in a row, with most of the indices ending last week well under key technical support levels.  It was so bad, in fact, it was good in that we just might see a dead-cat bounce. Indeed, we started to see the market clawing its way back from intraday lows on Friday, suggesting traders think there’s too much value to simply ignore now. Don’t be surprised to see this week start out with more of the same buying.

Just don’t be too quick to jump to any sweeping bullish conclusions based on such an effort though. The bigger trend is still bearish even if the bulls can tack on some more gains here… for a couple of reasons.

We’ll look at those reasons in some detail below. First, however, let’s look at last week’s most important economic news and preview the economic announcements due this week.

Economic Data Analysis

It was a busy week, kicking off with a look at last month’s retail spending. Sales weren’t just up. They were markedly higher than expected, up 1.0% from June’s levels when not counting automobile sales. To the extent consumerism keeps the market moving forward (which is a lot), this is a significant tailwind many people may not have been expecting.

Retail Sales Charts

Source: Bureau of Labor Statistics, TradeStation

Capacity utilization and industrial output were also up and much higher than expected. One good month doesn’t completely snap either data set out of its funk and put them into new uptrends. Don’t jump to any conclusions here.

Capacity Utilization, Industrial Productivity Charts

Source: Federal Reserve, TradeStation

Finally, housing starts and building permits both edged a little higher in July, but only a little higher. These aren’t new uptrends either. This mostly looks like starts and permits settling in after some extreme volatility -- downward -- last year. The real estate market remains just so-so despite what looks like stabilization right now.

Housing Starts and Building Permits Charts

Source: Bureau of Labor Statistics, TradeStation

Everything else is on the grid.

Economic Calendar

Source: Briefing.com

This week we’ll get a couple of important economic reports that round out the look at real estate. July’s existing home sales will be posted on Tuesday, with new home sales due on Wednesday. Both are likely to roll in at June’s levels. And, June’s levels weren’t exactly impressive. Sales of existing homes are near multi-year lows seen in December; homeowners aren’t even interested in trying to sell their homes now (possibly looking to hold onto their low interest rates). Meanwhile, although would-be homebuyers are willing to purchase more new homes again than they were a year ago, their overall purchasing remains below long-term norms.

New, Existing Home Sales Charts

Source: Census Bureau, National Association of Realtors, TradeStation

Finally, on Friday we’ll get the third and final (and official) figure for the University of Michigan Sentiment Index. Forecasts are calling for a slight decrease from July’s last print, but July’s number was notably better than numbers from just a year ago.

Consumer Sentiment Charts

Source: Conference Board, University of Michigan, TradeStation

The Conference Board’s consumer confidence data for August will be coming out next week. It’s starting from a pretty high level as well thanks to solid rebound in July. Again, to the extent that consumers need to contribute to marketwide bullishness, they seem to stand ready to do it.

Stock Market Index Analysis

Yes, the market managed to fight its way back to what was essentially a breakeven on Friday. Don’t get too excited just yet though. Stocks were careening the three prior days, and were deep in the red again on the fourth day -- Friday -- before snapping back. A pushback was likely no matter what. It’s not necessarily the beginning of a bullish reversal. The daily chart of the S&P 500 tells the tale.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeNavigator

Also notice that the volume for Friday was light, suggesting the volume behind the intraday rebound was light… meaning it’s not necessarily a majority opinion.

Still, to see traders plowing back into the market rather than filing out of it to end the week is telling.

Same story for the daily chart of the NASDAQ Composite. That is, it may have partially snapped back on Friday. Consider the depth of the selling seen over the course of the prior two weeks though. A bit of bullish pushback could have been expected. Again, however, it was a low volume effort.

NASDAQ Composite Daily Chart, with VXN

Source: TradeNavigator

Backing out to a weekly chart of the composite puts things in perspective. Last week’s net loss is more or less in line with the prior three weeks’ worth of selling. The selling, however, is experiencing its first floor in the form of the 100-day moving average line (gray) at 13,155. You could expect a pause here. That doesn’t necessarily mean this is the end of the selling though.

NASDAQ Composite Weekly Chart, with VXN and Volume

Source: TradeNavigator

The weekly chart also shows us how much the NASDAQ’s volatility index (VXN) is starting to work its way higher… which is bearish for the broad market. On the flipside, the VXN seems to be bumping into a bit of a ceiling around 23.3 (dashed, yellow). It will need to clear that resistance and the NASDAQ Composite itself will need to break below its 100-day line before we can expect any more downside. That may not happen immediately though. It could take a couple of days for the bears to regroup and restart the effort. Don’t confuse a lack of bearishness with bullishness to start this week.

Here's the weekly chart of the S&P 500. The same basic idea applies here. That is, the index is testing its 100-day moving average line and the S&P 500’s volatility index (VIX) is starting to creep higher. But, the S&P 500 itself isn’t in the midst of an uncontrollable selloff… at least not yet.

S&P 500 Weekly Chart, with VIX and Volume

Source: TradeNavigator

Don’t be surprised to see the bulls push back a bit here. Again though, don’t read too much into it. The past three weeks have been decisively bearish, leaving stocks attractive to dip-buyers. There’s still a lot of froth left to burn off. The volatility indices are arguably the big “tell” as to if-and-when the market’s going to make another leg lower.