Weekly Market Outlook – Yes, That Was the Breaking Point. Now What?

After tiptoeing on the edge for weeks, stocks finally fell off the cliff. Conflict in the Middle East and interest rates were cited as the catalysts (and to some extent they were). Traders who are being intellectually honest, however, can see that last week’s technical breakdown was actually set up and put into motion weeks ago.

The key question is still the same though. That is, from here, now what? Was that the bottom? Is there more downside to dish out? Will stocks move straight there if they’ve not yet hit their floor?

We’ll get to all of these things in a moment. First, let’s look at last week’s top economic reports and preview what’s coming this week.

Economic Data Analysis

Last week’s big news was of course the Federal Reserve’s decision to leave interest rates alone (as was widely expected). And, we’ll get to that discission in a moment. Let’s first run through everything else that was posted last week just to make sure we know everything there is to know, beginning with Monday’s update of industrial production and capacity utilization (of U.S. factories) for February. In short, both are still good, and came in slightly better than expected to extend forward progress.

Capacity Utilization, Industrial Production Charts

Source: Federal Reserve, TradeStation

Things may be a little bit too good, in fact, in the sense that factory input costs were up bit more than anticipated. Producers’ overall input prices jumped 3.4% year over year last month, and on a core (ex food and energy), they edged up a little more to 3.5%. In both cases, the gains extend concerning uptrends that are not only not being matched by consumer inflation. In fact, consumer inflation continues to move in the direction. It’s not clear if this will weigh on the Fed in the future or now.

Consumer, Producer Inflation Charts

Source: Bureau of Labor Statistics, TradeStation

Regardless, these producer inflation numbers of course came a little bit too late for the Federal Reserve to consider when making its call on the Fed Funds Rate, although given the FOMC’s commentary, it probably wouldn’t have mattered. More on that in a moment.

In the meantime, you might be shocked to learn that new-home sales took an unexpectedly big tumble in January, falling from December’s pace of 745,000 units to only 587,000, versus expectations of 719,000.

New, Existing Home Sales Charts

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

It’s still not entirely clear why new-homes were wrecked in January, but do not that existing home sales also slumped in January (albeit not as much). The good news is, that stumble was clearly quelled for February.

As for interest rates, as was noted (and as you likely already knew), the FOMC opted to maintain its target range for the Fed Funds Rate at between 3.5% and 3.75%. It notes that economic activity remains strong while simultaneously recognizing this also keeps the prospect of rekindled inflation “elevated.” And, without saying so explicitly, although the consensus plan is still to make one more quarter-point rate cut sometime before the end of the year – albeit later in the year – Fed Chairman Jerome Powell is also leaving the door wide open to no rate cuts, particularly if the conflict in the Middle East lingers on and causes sustained inflation of… well, everything, but particularly higher prices of oil.

Everything else is on the grid.

Economic Data Report Calendar

Source: Briefing.com, TradeStation

This week’s going to be very tame. In fact, the only item of interest in the lineup is Friday’s third and final update of the University of Michigan’s consumer sentiment index for March. Look for a slight lull, ending in budding hopes that confidence was/is recovering.

Consumer Confidence Charts

Source: University of Michigan, TradeStation

The Conference Board’s consumer confidence score for this month is due next week, although it’s bigger-picture downtrend isn’t likely to be redirected either.

Stock Market Index Analysis

When all was said and done, the S&P 500 tumbled 1.8% last week, although its close of 6,506.65 was 3.7% below Tuesday’s peak following its (unsurprising) bullish start to the trading week. Headlines did a lot of the work, although somehow it seems like all of this was likely to happen sooner or later anyway. Take a look.

S&P 500 Daily Chart, with Volume and VIX

Source: TradeNavigator

Yes, you’re seeing that right -- the S&P 500 also fell under its 200-day moving average line (green) at 6,621.74 last week, breaking under some other previous key lows in the process. Notice ethe 50-day moving average line (purple) is also on the verge of falling under its 100-day line (gray), with both now sloped downward… another hint that bigger-picture momentum has taken a bearish turn.

Here’s the weekly chart of the S&P 500, with something new on it. That’s the key Fibonacci retracement levels, using last April’s low as the starting basis. Last week’s low is suspiciously aligned with the 23.6% retracement level of 6,487.6, which isn’t a major Fibonacci line, but a noteworthy one all the same. You would expect the bulls to at least try to start pushing back here, even if they end up being unable to start a sustained turnaround effort. The 38.2% retracement level of 6,170 is a far more meaningful support level, if more downside than we’ve already seen is in the cards. Sliding back to that mark would mean a 12% correction, which is a much healthier cleaning of the proverbial slate.

S&P 500 Weekly Chart, with MACD and VIX

Source: TradeNavigator

There’s something else curiously noteworthy evident on the weekly chart though. That’s the volatility index, or VIX. It didn’t surge even though stocks imploded in a way that’s more than a little fear-inducing. Indeed, the VIX barely budged for the week.

So what? This lack of outright defense-spurring panic suggests that traders don’t actually think the worst is over yet. All of this bearish action seems to make perfect sense to the crowd. The S&P 500 isn’t apt to reach its ultimate low until we see the VIX do something more along the lines of what we saw in April.

Sure, Friday was a triple-witching day, where a wave of option expirations can spur a bunch of activity for equities as well as the VIX’s underlying options themselves. This would normally have the effect of spurring more movement rather than less movement from the volatility indexes though (and it did cause a volume surge). The VIX’s lack of movement (again) suggests that most traders don’t yet feel like this pullback has run its full course. And the weekly chart of the NASDAQ Composite and the VXN below says the same thing.

NASDAQ Composite Weekly Chart, with MACD and VXN

Source: TradeNavigator

Notice the NASDAQ happened to break under its 23.6% Fibonacci retracement level of 21,694.4, by the way, somewhat clearing the way for a slide back to the more meaningful 38.2% retracement line of 20,353.

Just don’t be surprised if the market doesn’t attempt to get there directly from here.

Yes, last week’s selloff was so bad that we’re apt to see something of a dead cat bounce early this week. Just don’t read too much into it. It’s purely reactionary. Given how committed the bears and sellers just became, the market will now likely want -- and even need -- to see this pullback fully play out and reach one or more of the aforementioned floors. It’s just not likely to get there in a straight line. We’ll probably get a little pushback first. Don’t be impressed until/unless it pushes the market back above its key moving average lines and/or obvious resistance levels (including previous support levels).