Weekly Market Outlook – Not the Recovery Effort It Seems Like It Is

When they needed to the most, the bulls found a way of fighting back. Just don’t read too much into last week’s 3.7% rebound from the S&P 500. Thanksgiving week is usually artificially bullish (last week’s actual volume was increasingly weak), and after three rough weeks before last week, some sort of bounce back could have been expected. The real test of this recovery effort comes this week, although to its credit, the market did manage to fight its way back above a couple of critical lines in the sand.

We’ll weight it all in a moment. First, let’s work our way through the economic news that was served up last week; we’re catching up on some of the numbers that were delayed by the federal government’s shutdown.

Economic Data Analysis

The party started on Tuesday, with September’s (not October’s) retail sales from the Census Bureau. As expected, they were up -- modestly -- extending long-established trends even if much of this progress reflects simple inflation. At the very least consumers are coming up with the money to pass along to retailers.

Retail Sales Charts

Source: Census Bureau, TradeStation

We also confirmed September’s consumer and producer inflation rates, more or less matching the recent rates… which are at or near the Federal Reserve’s long-term targets. Despite the rhetoric, it’s going to be tough the Fed to justify the rate cuts that are supposed to be on the near-term radar.

Consumer, Producer Inflation Rate Charts

Source: Bureau of Labor Statistics, TradeStation

We also heard the Case-Shiller Home Price Index from Standard & Poor’s on Tuesday, again for September. They fell slightly -- again – as did the FHFA’s measure (albeit slightly) for the first time in a while. This lull underscores the argument that the housing market really is starting to cool off; further underscoring this argument is still the fact that total transactions remain at relatively low levels.

Home Price Index Charts

Source: Standard & Poor’s, FHFA, TradeStation

Finally, although not yet plotted on our chart below, the Conference Board’s measure of consumer confidence tumbled to a multi-month low of 88.7, jibing with last week’s reported major lull in the University of Michigan’s sentiment measure.  

Consumer Confidence Charts

Source: Conference Board, University of Michigan, TradeStation

We still contend that there’s a potential contrarian aspect to the consumer confidence numbers. That is to say, the market might be hitting bottom when consumers are feeling their most pessimistic. The problem with this premise is timing. We don’t exactly know when consumers are feeling their lowest, and it could take weeks for the market to hit its ultimate bottom (and it’s certainly nowhere near what could constitute a major low right now).

Everything else is on the grid.

Economic Data Report Calendar

Source: Briefing.com, TradeStation

This week is going to be a fairly light one, largely because we’ll not be getting a report we’d usually expect for the first week of any given month. That’s the jobs report for October, which has been postponed for at least another week. We will be getting ADP’s employment report on Wednesday though, offering a hint of what may be in the cards. Also keep your eyes and ears open on Friday for the September’s consumer spending and personal income data from the Census Bureau, with the Federal Reserve also considers when making interest rate decisions.

The coming week’s biggie, however, is arguably Monday’s manufacturing index update from the Institute of Supply Management to be followed by the Services Index update on Wednesday. Both remain stagnant, and not at particularly impressive levels.

ISM Services, Manufacturing Index Charts

Source: Institute of Supply Management, TradeStation

Stock Market Index Analysis

Yes, stocks bounced back with a bit of a vengeance last week, with the S&P 500 soaring 3.7% while the NASDAQ Composite jumped more than 5%. Based on these numbers alone it would be easy to jump to a bullish conclusion.

Just keep the action in context. The holiday-shortened trading week tends to be a good one, but not one that necessarily sees any real bullish follow-through. There was also a conspicuous amount of volume lacking with the effort; this isn’t necessarily a majority opinion.

Still, the move pushed both of the key indexes back above important lines. As the daily chart of the S&P 500 below shows us, for instance, the index is now back above both its 20-day moving average line (blue) and its 50-day line (purple). If a dip is in the cards, at least being above them now gives the index something to potentially act as a floor.

S&P 500 Daily Chart, with Volume and VIX

Source: TradeNavigator

Ditto for the NASDAQ, although its daily chart below shows us something else worth pointing out. That’s the fact that the rally effort stopped when a long-established technical support line (yellow, dashed) was encountered.

NASDAQ Composite Daily Chart, with Volume and VXN

Source: TradeNavigator

Does this mean anything? Maybe. Or, maybe not. It’s too soon to say. It’s just curious, and worth mentioning simply because if the bears wanted to start pushing back again, this would be the next best place to do so.

The NASDAQ Composite’s daily chart also reminds us, however, that the 100-day moving average line (gray) at 22,162 is still a major technical floor; the same goes for the S&P 500. Even a rekindled pullback effort from here wouldn’t necessarily have to evolve into a full-blown disaster.

Here’s the weekly chart of the NASDAQ, for a little more perspective. As you can see, the composite is still ultimately framed within a long-established bullish channel, having recently pushed up and off the dissecting midline of that rising range to move back within sight of the channel’s upper boundary. It’s going to be tough to move above that ceiling no matter what happens next, and no matter how much momentum it feels like we have at the time.

NASDAQ Composite Weekly Chart, with MACD and VXN

Source: TradeNavigator

Honestly, last week’s action is such an outlier that it would be dangerous to come to any conclusion based on it. It’s bullish in and of itself, but we know the market’s technically overbought not to mention overvalued. It’s going to be tough to add gains from here.

Yes, so far most anything that could serve as technical support has done so, staving off any serious selloff. There’s just no denying the 50%(+) runup from April’s low is inviting to profit-takers. It’s just that the fear of missing out on more upside is preventing enough selling to kick-start a more serious selloff.

The risk is still there though. It just needs a catalyst… a catalyst that is far less likely to materialize during the last month of the year, which is historically bullish. Don’t be surprised to see a lot of push-and-pull indecision for a few weeks, with not much net progress in either direction.