Will The Bear’s Toehold Sink In Deeper?

Though just barely, the market closed lower for the second week in a row last week after hitting new multi-year highs just three weeks ago. Worse, the major indices closed under a key short-term trend indicator line, confirming that the tide is at least trying to switch to a bearish one.

We’ll poke and prod this bear attack below. First though, let’s start with the bigger picture… last week’s major economic data.

Economic Calendar

It was a light week last week in the grand scheme of things, with most of the heavy-hitting stuff coming later in the week. Here’s a summary:

* Initial claims fell significantly, from 478K to 434K. It’s a surprising reduction in the prior week’s surge, but still doesn’t bring the number back to below the key 400K mark. Ongoing claims were about even, at 3.756 million.
* Producers are still feeling the same pinch consumer are, with input prices rising 0.8% last month on a total basis, though only 0.3% on a core basis.
* Speaking of, last month’s consume price index was up 0.4%, and up 0.2% on a core (ex food and energy) basis. The current ‘inflation rate’ now stands at 3.16% – the highest we’ve seen October of 2008 when after the market imploded. We’re now close to the point where prices have to stop going up, or trouble really starts.
* Retail sales were up 0.5% last month, and up 0.6% not including auto sales. We are still at all-time record retail sales levels in the United States.

Here’s the whole shebang:

Economic Calendar

The coming week is also pretty light in terms of the amount of data, but we are getting a few biggies:

* Tuesday: Housing starts and building permits. Look for the former to rise to 565K for April (up from 549K), with the latter rolling in at about the same as last month…590K.
* Also on Tuesday: We’ll learn of last month’s industrial production and capacity utilization. THESE ARE THE TWO BEST LONG-TERM ‘ECONOMIC-MARKET BAROMETERS (short-term not so much, but long-term, they’re great). Productivity should be up 0.5%, and the latter should be up to 77.7%. Both continue to press toward cycle highs.
* Thursday: Continuing claims and ongoing claims…. look for more modest declines on both fronts, but those slight improvements aren’t going to cut it.
* Also on Thursday: April’s existing home sales are expected to rise from March’s 5.1 million to 5.22 million.

Stocks & Volatility

It was only a 2.43 point loss last week for the S&P 500 (SPX) (SPY) (-0.2%), but being the second losing week in a row following the ‘buy into these new highs’ calls being made two and three weeks ago, it’s enough to start casting some serious doubt (for the bulls).

The short-term indicator line mentioned above was/is the 20-day moving average line, at 1341.4, versus the S&P 500′s close at 1337.77 on Friday. It’s only the second time in the last three weeks the market has closed under the 20-day average line, but this one follows the first lower high since the peak from May 2nd.

Still, it’s not like the bears have that great of a toehold now – just an opportunity.

Something else that’s popped up in the meantime (and may or may not end up being all that big of a deal)….there’s straight-line support (orange) that extends all the way back to March’s low. It’s currently at 1333 – around Friday’s low – and rising fast. In fact, even the smallest slip-up in Monday and that line will be broken too.

One thing the bulls have going in their favor, sort of, is that last week’s selling volume was light. That’s a dubious advantage though, as what buying volume there has been on those rare bullish days has been even lighter; there’s still more (net) bearish volume… total volume has just been very light altogether.

SPX & VIX Daily Chart

The wrench in the works for the bears with the daily chart continues to be the CBOE Volatility Index (VIX) (VXX) (VXZ) – why isn’t it pushing upward? The 50-day moving average line (purple) at 18.3 is still holding the VIX down, and until the VIX can actually hurdle it, any bearish chatter here has to come with this footnote.

The thing is, if-and-when the 50-day average does finally break and let the VIX soar, there’s quite a bit of room for upside movement (and an equivalent amount of room for the SPX to fall).

The only targets worth thinking about right now – for the S&P 500 – are the 100-day line (gray) at 1308, and the lower Bollinger band (red) at 1276.

Nothing much to add about the weekly chart below…just confirmation of what the daily chart is suggesting. It’s here, however, we can see just how overextended the market got between August of last year and three weeks ago. Things have been a real struggle since March, yet it still doesn’t feel like we’ve paid an adequate price.

It’s also on the weekly chart we can fully appreciate how the VIX is trying to push up and off a floor around 15.10.

SPX & VIX Weekly Chart

Sector Performance

The market’s former leaders – materials (XLB), financials (XLF), and energy (XLE) – continue to get hammered… much more so than other sectors. Since the March 15th low, financials and energy are almost back to a mere break-even, and materials are getting there fast (+3.9%). For comparison, the market’s still up 6.2% since the middle of March.

As for what’s worth owning, the only sector that was up last week isn’t a new winner; healthcare (XLV) stocks managed to advance again, maintaining their leadership spot.

However, keep in mind that if the braid market gets deeper into trouble, it’s very likely all sectors will actually lose ground. At that point, a ‘long only’ investor will need to look past broad sectors and start pinpointing more narrow specific industry-level trends to trade.

Sector Performance, since March 15th

Trade Well,
Price Headley