The weekly losses are racking up. Last week’s was the sixth in a row, and it just so happens to be the longest losing streak since 2002. (It’s not the biggest losing streak, just the longest-lasting in that there’s not been a single week of bullish reprieve).
Is this a case of “the worse it gets the worse it’s going to get?” Or, does this last week just bring us that much closer to the ultimate bottom?
We’ll discuss it below, bur first a rundown of the key economic numbers.
Last week may have been one of the lightest weeks of the year in terms of the number of pieces of economic data. And, what little we got was quite mediocre.
In terms of consumption, consumer credit grew by $6.3 billing in April, slightly ahead of expectations. It’s been growing in that range for months now though – consumers CAN get credit.
There aren’t more people working though. As we looked at a couple of weeks ago, the total number of working Americans – which is the other side of the unemployment coin – has stagnated around 136 million for months now.
And, as we learned last week, more and more are starting to ask for unemployment benefits again. It’s a tad soon to say it’s a new uptrend, but the downtrend we had been seeing from new and initial claims has clearly stopped for the time being. That won’t help the market or the economy.
In any case, continuing claims fell slightly a couple of weeks ago, from 3.74 million to 3.67 million. New claims rolled in at 427K last week, a hair higher than the prior week’s 426K.
The coming week will be much busier. Here are the biggies to watch out for:
* Tuesday: The ball gets rolling with retail sales figures. Cars seem to be the stumbling block. Not counting auto sales, retail spending should be up a tad. With care, it should be lower. Producer inflation is also out on Tuesday; look for a more modest increase this time.
* Wednesday: May’s consumer inflation index data – the one everyone just refers t as “the inflation rate” – will be unveiled on Wednesday. Again, look for a more modest increase this time around (+0.1% on a core and non-core basis). We’ll also get the two best economic-to-market ‘tells’ on Wednesday…industrial productivity and capacity utilization. Again, both should be up a little, which for now is at least enough to keep socks pointed tepidly upward in the bigger picture, even if not in the short run.
* Thursday: New and ingoing unemployment claims, as usual. Look for little change. We’ll also hear about May’s housing starts and building permits. Again though, the pros aren’t looking for a significant change from the prior month’s figures.
* Friday: The first estimate of the Michigan Sentiment Index for June will be posted on Friday. This preliminary figure tends to change significantly between now and the end-of-the-month figure, so don’t take it to heart. The Fed’s leading indicators coming on Friday don’t mean a whole lot either.
S&P 500 Index
Last week, the S&P 500 tumbled 29.18 points, closing at 1270.98…. a 2.2% dip, and the biggest one of the six-week losing streak. The index is now 7.3% beneath its peak value from early May.
Is that enough of a dip to say the bottom has been made? It’s not crazy to be thinking we could have just seen the end of the selling and the rebirth of a new uptrend, given some of the things we’re seeing on the chart. One of the big ones [and you’ll see this clearly on the weekly chart] is that the volume behind this selling effort has been quite tepid.
But no, that contraction isn’t on par with – or even in the range of – what could be considered a normal and healthy correction. It takes a dip of 10% more (usually) to really setup a capitulatory bottom. We are getting close though, and more important, the fear is finally starting to creep in. That’s ultimately a bullish thing.
One of our great lamentations about this past six weeks and the fact that we could never stop the bleeding was the CBOE Volatility Index, or VIX. It should have been going higher as the market fell, indicating a growing amount of worry. The scariest day of all – which would coincide with a surge for the VIX – would also likely be the ‘blowout’ day needed to hit a bottom. The problem is/was, we hadn’t seen a glimmer of a rising VIX (or rising fear) despite the fact that we’re now six weeks into a losing streak….until now.
Though it’s still oddly contained, the CBOE Volatility Index is at least pressuring its horizontal ceiling at 19.10 (dashed) and the upper Bollinger band at the same level. THIS IS AN IMPORTANT INFLECTION AREA.
SPX & VIX Daily Chart
One of two things will play out here. Either the VIX’s resistance levels will indeed push it lower again, and in turn the S&P 500 will likely start to move higher again. This is the slightly-lower-odds outcome here, and in the grand scheme of things, not the healthiest thing that could happen for the bulls. It would simply mean the market would have to come back and pay the piper later, as stocks would still be broadly overbought, and the VIX would still be uncomfortably low (i.e. better to get it over-with now, than suffer a bigger correction later).
The other (and slightly higher odds) outcome here is that the VIX will finally punch through this ceiling, and make a run not unlike the one we saw in March after Japan’s earthquake. This would fully pop the bubble, at which time the market can begin inflating it again. Only this time, there’d be room for a full re-inflation.
That being said, we have to remind you that last year, the summer-time implosion happened in three distinct waves (one in May, one in July, and August). And, that weakness pulled the SPX well under the 200-day moving average line (green). So, don’t automatically assume the 200-day line at 1251 will halt the market’s tumble now. It might, but we can’t count on it. (Point being, we don’t know what the ultimate floor for the S&P 500 is supposed to be.)
You can also see that the VIX spiked to a high of 48.20 in May of last year and then started to subside, yet the S&P 500 itself still fell for weeks after that happened. (Point being, we don’t know what the peak level for the VIX is supposed to be either, and even if it does spike it doesn’t mean the market’s hit a bottom.)
So, this is clearly a day-by-day dance. If this summer is like last summer, plan on a few head-fakes in both directions.
In the very near-term we’re only concerned with (and expecting) a breakout from the VIX, which is likely to coincide with the market’s slide under the 200-day line. That, however, is what’s needed to get this corrective move at least to the 10% mark. So, don’t assume it’s an entirely bad thing. And, don’t assume it will have to happen on Monday. Indeed, we’re looking for a dead-cat bounce after last week’s implosion. It would take a lot to reverse this downtrend from here.
We’ll have to reassess after any pullback and subsequent rebound effort. The concern would be a repeat of last years three-wave (and four-month) pullback.
SPX Weekly Chart