Weekly Market Outlook – The Worst-Possible Kind of Rebound Effort

Based on nothing more than the numbers alone it would be easy to jump to a bullish conclusion. The S&P 500 gained 3.5% last week, following through on the previous week’s recovery effort, and hurdling several important technical ceilings in the process.

As far as accelerating recovery efforts go, though, this all unfurled in the exact way you don’t want to see it happen. A major gap was left behind, and there was never really any significant volume behind the move anyway. Moreover, the NASDAQ Composite suspiciously stalled right at a key make-or-break level.

This doesn’t inherently mean the rebound is doomed (even if it needs to regroup). It does mean, however, you should be fully prepared for the possibility that last week was nothing more than a temporarily bullish glitch spurred by headlines regarding the conflict in the Middle East. It could unfurl just as quickly.

We’ll show you how and why in a moment. Let’s first run through last week’s economic news and preview what’s in the lineup for this week.

Economic Data Analysis

Obviously last week’s big news was Friday’s consumer inflation report, but the party started on Monday with last month’s ISM services index. It fell a little more than expected, but at 54.0, it’s still well above the pivotal 50 mark. Also bear in mind that the ISM manufacturing index is also still healthily above the 50 level.

ISM Manufacturing, Service Charts

Source: Institute of Supply Management, TradeStation

Note that the second revision of Q4’s GDP growth was also released last week. It went from bad to worse… from 0.7% to 0.5%. It doesn’t matter a whole lot now (here at the beginning of Q2), but it does underscore that things have been pretty tepid for a while now.

Also on Thursday we learned that consumer spending remained reasonably strong in February, but personal income growth stalled. Much of this somewhat-unfunded spending growth reflects higher prices…

… price increases that were confirmed in Friday’s consumer inflation figures. Overall inflation edged up to near a two-year high of 3.3%, while core consumer inflation (ex-food and ex-gas) also inched up 20 basis points to 2.7%. This dramatically cuts back on the Fed’s flexibility to lower interest rates in the foreseeable future. Maybe it was a temporary fluke, but that’s not certain enough to bet on.

Consumer, Producer Inflation Rate Charts

Source: Bureau of Labor Statistics, TradeStation

March’s producer inflation figures will be reported on Tuesday of this week. Everything else is on the grid.

Economic Data Report Calendar

Source: Briefing.com, TradeStation

In addition to last month’s producer inflation data this week, on Monday, look for last month’s existing home sales data from the National Association of Realtors. Forecasts call for about the same pace as February, which is still cyclically low.

New, Existing Home Sales Charts

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

We’re still waiting for the Census Bureau to catch up on the new home sales numbers that were delayed by the government shutdown. No word yet on when we’ll get them for February, although it’s possible they’ll sneak in this week.

The only other item of any real interest scheduled for this week is Thursday’s look at industrial production and utilization of the nation’s factory output capacity. This has actually been one of the most consistently-encouraging data sets, rising since early last year even when the market and headlines weren’t exactly as bullish. Economists believe we’ll more or less match February’s numbers with March’s report, which all things considered, isn’t bad.

Industrial Production, Capacity Utilization Charts

Source: Federal Reserve, TradeStation

Stock Market Index Analysis

We start this week out with a fairly close-up view of the daily chart of the S&P 500, just to show you exactly how it all panned out last week. On Monday and Tuesday, the bulls managed to eke out a little bit of follow-through on the previous week’s rebound effort. As you ca plainly see though, encouraging news regarding the conflict in the Middle East catapulted the market on Wednesday. In fact, by Thursday the S&P 500 was back above all of the key moving average lines we care about.

S&P 500 Daily Chart, with Volume and VIX

Source: TradeNavigator

As far as firming up a rebound effort in a way that allows it to last, though, that’s not what we got. Never even mind the sheer scope of the move. Wednesday’s big opening gap is going to hold the bulls back (investors have a tendency to backfill gaps, so there’s apt to be bearish pressure from here that could start a more prolonged correction). The real problem here, however, is the fact that there was never really volume behind the move; this isn’t necessarily a majority opinion. In this same vein, in light of the big gains the market logged over the course of the past couple of weeks, the S&P 500 Volatility Index (VIX) at the bottom of the chart didn’t plunge when it arguably should have. This suggests that people are still thinking and positioning rather defensively.

The daily chart of the NASDAQ Composite looks similar, although not identical. The chief difference here is also the most concerning detail for the bulls. That’s the fact that the NASDAQ tested the 100-day moving average line (gray) at 22,904, but was never able to get and stay above it. And like the S&P 500, there was a suspicious lack of volume behind the effort.

NASDAQ Composite Daily Chart, with Volume and VXN

Source: TradeNavigator

Here’s the weekly chart of the S&P 500, for what it’s worth… which isn’t much. The chief take-away from this chart is just to absorb how big the 7.2% gain over the course of the past two weeks is. It unwound four weeks’ worth of selling, and got the index back within sight of January’s peak near 7,000.

S&P 500 Weekly Chart, with MACD and VIX

Source: TradeNavigator

And, that’s the problem. It’s too much, too fast. It’s also a little aggravating that the reversal from a couple weeks ago didn’t take shape at a known or established technical support level… not even either Fibonacci retracement line. It should have. These things typically aren’t arbitrary.

So now what? As momentum traders, we have to be bullish here. It’s a very hesitant, cautious bullishness though. We know this is the least healthy kind of recovery effort. We also know that even the slightest lull meant to let the bulls regroup and restart could also be interpreted as a sign of weakness, opening the door to another wave of selling. That could be the best thing in the long run though, by virtue of dragging both indexes all the way into full-blown correction territory to set up a rebound. Traders clearly weren’t ready to really participate in this one, which is why it’s arguably doomed.

Let’s just see how things shape up from here. If the now-converting 50-day and 200-day moving average lines end up acting as technical support, it will give this rebound effort a fighting chance of surviving long enough to go somewhere.