Sector Rotation, But Rising Bearish Volume – Weekly Market Outlook

The market came close to pulling its fat out all the way out of the fire last week, with Thursday’s close being well above the prior Friday’s closing level. It would have meant two weekly gains in a row, even if the first of the two weeks was a microscopic winner. On Friday though, the bears roared, driving the market to a small loss for the week instead… the seventh losing week in the last eight.  

Yes, it looked like stocks might be ready to reverse course two weeks ago, only to see the rug pulled out from underneath those hopes. Don’t assume last week’s small loss is a sign that more downside is on the way. (On the flipside, don’t assume Friday’s dip was a dismissible fluke either – when you take a step back and look at the bigger picture there’s still cause for concern.)

We’ll look at the good, the bad, and the ugly for the market below, right after the usual run-down of economic data.

Economic Calendar

It was a pretty big week for real estate, though not necessarily in a good way. Existing home sales slumped from a rate of 5.0 million to 4.8 million, mortgage applications fell 5.9%, and new home sales fell to an annual rate of 319K, from 326K. Yay. The one bright spot was barely a bright spot… home prices (of sold homes) rose 0.8%.  

On the jobs front, there still aren’t enough to keep enough people employed. New unemployment claims reached 429K – the highest level since mid-May. And, considering we were seeing readings below 390K in the first quarter of the year, it’s hard to deny initial claims are in an uptrend. Continuing claims rolled in at 3.697 million, and is also starting to trend higher. 

Durable orders were solid for May, up 0.6% without autos, and up 1.9% when counting cars. It’s a welcome reversal from the prior month’s dropoffs.  And, Q1’s GDP growth was confirmed at 1.9%.

Economic Calendar

We’ve got a ton of stuff for the coming week; here are the biggies and some food for thought:

* Monday: Personal income and spending

* Tuesday: Case-Shiller and consumer confidence. The Case-Shiller is relatively pointless, but a poor confidence score could torpedo what’s left of the market. Yet, a strong reading won’t help much.

* Wednesday: Pending home sales will round out the real estate picture. The pros are expecting a 2.0% improvement, but bear in mind it’s a relative piece of data that’s destined to look good following the prior month’s 11.6% contraction. 

* Thursday: New and ongoing unemployment claims. Higher readings from either will likely be more than the bulls can withstand, but it would take a huge dip in claims to boost stocks.

* Friday: The second reading for June’s Michigan Sentiment Index will be unveiled, but not being a final reading, so what? We’ll also get auto sales levels for June though, and that will be telling (and market moving).

S&P 500 Index


Technically speaking, the bulls are still in the hunt. The S&P 500 (SPX) (SPY) is still above the 200-day moving average line, and in fact, used the 200-day line to spark Thursday’s intraday rebound. Even with Friday’s dip, the index is still above the important 200-day average. 

The momentum, however, is clearly pointed in the other direction…. as is volume, which is the even bigger red flag here.

It’s something we had specifically pointed out wasn’t a problem a couple of weeks ago – though falling, there wasn’t a great deal of interest in participating in the pullback. Just when the bulls made their first real threat though (on pretty good volume) in the early part of last week, the bear struck back even bigger – and on big volume – Thursday and Friday right after the 20-day moving average line was brushed from underneath. 

So, here we are, stuck in the middle, waiting for one boundary or the other to crack. The upper edge of the box is at 1292, and the lower is at 1262. Whichever crack first, the other one wins. 

SPX & VIX Daily Chart

With all that being said, the weekly chart puts things in perspective in a way had hadn’t seen yet throughout this pullback. 

Like the daily chart, we can see here the S&P 500’s downtrend is still basically intact – no surprises. What we can also see here fort the fist time in a long time is how the CBOE Volatility Index (VIX) is finally starting to make its way higher. If this is a trend as it appears to be, and not just a temporary blip, then the selloff isn’t over. 

To that end, note that the S&P 500 has not yet hit its longer-term lower Bollinger band. It’s getting close, but it’s not there yet. 

The lower band at 1229 [and there’s a pretty good historical precedence for this set of Bollinger bands acting as a boundary], would translate into a 10.2% pullback from high to low. As we’ve said several times already, a 10% pullback is pretty much the minimum correction needed to allow a full ‘reset’ for the market’s upside.  

SPX & VIX Weekly Chart

The weekly VIX is already attacking its upper Bollinger band, so running into that ceiling isn’t something we can use as a signal of a market bottom. Still, if the SPX does manage to break under the 200-day average, that should spark enough fear to really accelerate the VIX’s current uptrend. Hopefully, it will accelerate it well enough for it to reach major peak levels the 30’s, at which time a strong reversal effort will be crystal clear.

Or, who knows….maybe the bulls will hold it together well enough now to just hold the line at the 200-day moving average long enough to find their way back above the 20-day moving average line. 

Needless to say, this is a critical week for stocks. Let’s wait and see how it plays out before making a play. 

Sector Performance


nancials are still getting killed, and healthcare’s still hanging in there. We are, however, seeing a little new buying interest in the laggards since March (energy, materials, transportation), and a little less enthusiasm for the leaders (healthcare, utilities, and consumer goods)… true sector rotation.  It’s nothing to hold up and cry "bullish evidence" yet, but it’s something we’re going to watch closely from here. 

Sector Comparison, since March 18th

Trade Well,
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