Weekly Market Outlook – That's (Pretty Much) the Gut Punch That's Been Brewing For a While Now

You can only play with fire for so long before getting burned. That’s finally what happened last week. After several weeks’ worth of no progress while pressure was repeatedly put on moving average lines as technical support levels, they finally buckled. With some help from the conflict in the Middle East, the S&P 500 fell nearly 2% last week, breaking under important support levels and reaching multi-week lows in the process. With the floodgates now open, it’s going to be difficult to stop the long-overdue correction from taking hold.

Still, never say never.

We’ll look at the damage and what it likely means in the long run in a moment. First, let’s recap last week’s top economic reports and look at what’s coming this week.

Economic Data Analysis

There’s no sense in starting this week’s commentary by ignoring the 800-pound gorilla in the room. That’s the jobs report for last month. It was pretty awful, even if not horrific. With the wave of well-storied corporate layoffs finally taking hold, rather than gaining the 50,000 jobs economists were expecting after January’s payroll growth of 126,000, we actually lost 92,000 jobs. That was enough to ratchet the unemployment rate back up to 4.4%, and up-end the market as a result.

Payroll Growth, Unemployment Rate Charts

Source: Institute of Supply Management, TradeStation

Just take it with a grain of salt. The ADP Employment Report posted earlier in the week didn’t show the same trend. It said we gained 63,000 payrolls, with the improvement on January’s number of 11,000 coming in better than expected.

The clearly-good news about this probably-bad news is of course that it makes it much easier for the Federal Reserve to justify more accommodating dovishness, and sooner than anticipated.

This wasn’t the only economic news dropped last week, however. We also got updates on the Institute of Supply Management’s economic barometers. Manufacturing activity held steady above the pivotal 50 mark, while the services index soared from 53.8% to 56.1%, easily outpacing expectations for a slight slide to 53.5%. While their value as an economic indicator is questionable, to the extent it means anything both are surprisingly bullish now.

ISM Manufacturing, Services Index Charts

Source: Institute of Supply Management, TradeStation

Last but not least, the Census Bureau continues to do its part to catch us up with all the data that was delayed by the government shutdown, reporting January’s retail sales numbers just last week. As largely expected, they were less than great… flat, if not down slightly.

Retail Sales Charts

Source: U.S. Census Bureau, TradeStation

Just keep something important in mind here. That is, a pretty severe winter storm kept a wide swath of the country at home for a while a couple months ago. It wasn’t necessarily a lack of willingness or ability to spend stymieing these reports.

Everything else is on the grid.

Economic Data Report Calendar

Source: Briefing.com, TradeStation

This week’s going to be about as busy – if not busier – and certainly at least as critical in terms of the direction the market takes from here, and how the Fed is apt to move.

The party starts in earnest on Tuesday with a look at last month’s sales of existing homes to kick off a two-week stretch of real estate data. Forecasts call for a slight cooling in existing home sales, which should pretty much obliterate any hope for a recovery. Fortunately, sales of new homes increasingly seem to be taking up this slack (largely because for the first time in decades, new builds are the more affordable option).

New, Existing Home Sales Charts

Source: National Assn. of Realtors, Census Bureau, TradeStation

February’s new home sales number will be posted next week.

On Wednesday we’ll hear February’s consumer inflation report. Forecasters are calling for the slow decline in these numbers to finally start leveling off, but level off within the Fed’s target range.

Consumer, Producer Inflation Charts

Source: Bureau of Labor Statistics, TradeStation

Producer inflation data for last month isn’t coming until next week, by the way, rounding out the picture that will at least play some role in the FOMC’s future decisions regarding interest rates.

On Thursday look for February’s housing starts and building permits. Economists are looking for a slight pullback from January’s levels. Bigger-picture though, we’re still mostly just moving sideways.

Housing Starts, Building Permits Charts

Source: Census Bureau, TradeStation

Finally, on Friday we’ll get last month’s consumer expenditures and personal income changes. It should be interesting, in light of recently-reported sweeping job losses. Nevertheless, economists are expected the same pace of measured progress for both data sets that we saw in January. (No chart plotted here.)

We’re also getting the first look at the University of Michigan’s consumer sentiment reading for February on Friday. We’re far more interested in the third, final, and official figure posted nearer the end of the month, however.

Stock Market Index Analysis

Somehow, most traders had to know it was only a matter of time before the slow, bowl-shaped shift from rally mode to stagnation early this year to net losses last month would become what it just became. That’s the beginning of a full-blown pullback, marked by the S&P 500’s slide to a multiweek flow that feels like it’s been brewing since January… if not before, as evidenced by the weekly chart’s bearish MACD divergence since well before then. Take a look, if only for a little perspective before we take a more detailed look at the daily chart of the index. There’s not a lot of technical support left to count on stopping this selling anytime soon.

S&P 500 Weekly Chart, with MACD and VIX

Source: TradeNavigator

Here’s that daily chart. Not only is the S&P 500 now under its 20-day (blue), 50-day (purple), and 100-day (gray) moving average lines, the 20-day line has crossed under the 50-day, underscoring the shift in momentum. The index also fell under what might have been modest horizontal support around 6,770 (orange, dashed).

S&P 500 Daily Chart, with Volume and VIX

Source: TradeNavigator

Still, there’s just enough of a glimmer of hope that’s too big to ignore. That’s the fact that the selling seemed to stop at 6,709 on Friday, more or less where the S&P 500 bottomed on Wednesday as well as back in mid-December. At the same time, while the volatility index (VIX) managed to move above the ceiling at 23.2 that we’ve been watching as a trigger for a while, it does appear to be stalling as it tests the next resistance line up, at 28 (purple, dashed). Don’t be surprised to see the bulls take a stand here. In fact, we’re kind of counting on it.

Just don’t read too much into it either. Last week’s blow was actually pretty damaging -- even if not dramatic -- in the context of the action over the course of the past several weeks. The bulls might produce a dead-cat bounce, but getting the S&P 500 back above the convergence of several key moving average lines around 6,870 would take something of a miracle here.

Here’s the daily chart of the NASDAQ Composite, for perspective, which in most regards looks worse. It’s actually been clearly trending lower since early February, with the 50-day moving average line (purple) now following the 20-day line (blue) under the 100-day moving average line (gray). As was the case with the S&P 500, it points to a massive shift in the direction of the market’s momentum. Also note the NASDAQ’s volatility index (VXN) finally eclipsed the 29 mark (yellow, dashed), suggesting the tide has truly taken a turn for the worst.

NASDAQ Composite Daily Chart, with Volume and VXN

Source: TradeNavigator

We’re still expecting some bullish pushback based on the NASDAQ Composite’s daily chart, particularly now that its 200-day moving average line (green) at 22,087 is within reach. Indeed, a direct move to that line could spark and explosive recovery thrust.

As was the case with the S&P 500, don’t read too much into such a well-scripted reversal at the grandmother of all moving average lines. The NASDAQ would need to move all the way back above the now-converged 50-day and 100-day moving average lines to rekindle its longer-term rally rather than finish the correction that now seems to be started.

It’s still too soon to discuss downside targets though.