What Now After Last Week’s Huge Rally? – Weekly Market Outlook

What a week! Not only was it a winner, but it was the first real winning week in the last nine. In fact, the 5% gain was the biggest winning week we’ve seen in the last couple of years.

Of course, the big move begs the question…. is there any room left for an encore? We’ll take a look at an answer blow, right after a quick recap of the major economic data.

Economic Calendar

It was a moderate week in terms of data count last week, with most of it focusing on the health and confidence of the average consumer. And, it wasn’t the prettiest of pictures.

Spending was flat last month, and personal income was up 0.3%; both fell short of expectations. Confidence was down too, with the Conference Board’s Consumer Confidence level falling from 61.7 to 58.5. The final (3rd tally) Michigan Sentiment Index inched lower too last month, from the original expectation of 71.8 to a score of 71.5.

On the real estate/construction front, things aren’t looking better. Yes, pending home sales popped 8.2% for May, but remember – that wasn’t even a full offset of April’s 11.3% dip. The Case-Shiller (home price) Index slumped 3.9% in April, and construction spending fell 0.6%. Both of those numbers were worse than expected too.

Of course, it’s tough to buy a house if you don’t even have a have a job, and it’s not like those are in abundance now…. at least judging from the new and initial claims levels. Initial claims are still hovering in the high 420K area, and continuing claims remain in the 3.70 million range. Neither has shown marked improvement since the economy hit a wall a few weeks ago.

Economic Calendar

The coming week is a pretty busy one too, particularly in terms of jobs (or joblessness). Look for the Challenger job cuts number on Wednesday, the ADP Employment Change on the same day, then non-farm payrolls and the unemployment rate on Friday. The only forecasts we have so far are an unemployment rat of 9.1% (no change), and a non-farm payrolls addition of 80K…. which is well short of the 250K-ish area needed to whittle down the jobless rate.

On the manufacturing activity front, factory orders for May should be up 1.0% after April’s 1.2% dip (Tuesday), while wholesale inventory levels for May should have grown by 0.9% after April’s 0.8% increase (Friday). 

S&P 500

While we normally open up our chart analysis with a look at a daily chart and than zoom out to a weekly view for perspective, this week, we’re going to put the 5.4% gain for the S&P 500 (SPX) (SPY) last week into perspective, and then break it down into the daily chart… a decision that will make sense once you read through the commentary.

The sheer height of last week’s bar is stunning. From 1268 to 1339 – a 71-point move – is effectively unprecedented. That’s one of the reasons we can’t get too bullish here. In fact, we specifically shouldn’t get bullish about the big move, especially when considering just how light the volume was; this is not a ‘majority opinion’.

Thing is, the only troubling (to the bulls) aspect of last week’s big move is just the size of the move. There are no ceilings at Bollinger bands immediately above,

Likewise, there are no Bollinger bands immediately below ready to act as a springboard.

In simplest terms, the index is very much in limbo here, not overbought, nor oversold. It wouldn’t be unreasonable to assume the market is poised to just linger sideways for a while, giving both the upper band as well as the lower band a chance to converge towards the 1320-ish area before the next major move.

The tripwire is the annoyingly-low CBOE Volatilty Index (VIX). It looked like the Volatility index was indeed going to start trending higher two weeks ago – which would have been bearish for stocks – but last week popped that bubble before any momentum was developed.

Got it all framed up in your head? Good.

SPX & VIX Weekly Chart

To the bulls’ credit, the S&P 500 managed to blow right past any and all of its key moving averages, after the 200-day moving average line (green) and the lower 50-day Bollinger band (red) kick-started a recovery effort. From just a trend-following perspective, it’s the strongest buy signal we’ve seen in ages.

Veteran traders know there’s more to this game than just a "trend following perspective" though. In fact, if there’s one thing we’ve seen since February, it’s that reversals are the current norm.

The real killer here, however, is the VIX….. an idea already mentioned in the discussion of the weekly chart. On the daily chart we can the CBOE Volatility Index is not only struggling to break under its lower 20-day Bollinger band at 15.6, but Friday’s low of 15.12 is in line with lows observed pretty regularly since December. More than that, the brushing of this floor has usually come in front of a pullback.

Point being, there’s just a lot of risk packed into last week’s big gain, which didn’t actually have a lot of participation despite the size of the move. Take a look.

SPX & VIX Daily Chart

The bottom line is — whether last week was the rebirth of a bigger uptrend or just a fluke — the deck is stacked against the bulls this week. If this really is a new bull trend, it will be renewed somewhere between 1275 and 1317. And, such a rebound will coincide with a clear spike for the VIX, ideally at or above 23… where we’ve seen the VIX’s prior peaks, and where its upper 20-day Bollinger band is now.

Sector Performance

For what it’s worth, here’s a look at the most recent chapter in the sector saga. It’s a little pointless to worry about last week’s results, as the rapid rising tide lifted all boats quite sharply. But, since this is an ongoing analysis (of several weeks’ worth of developing momentum), we’ll update it this week so we’re not caught unaware next week.

Sector Comparison, since March 18th, 2011

Trade Well,

Price Headley