We knew we were due for a dip after the heroic rally three weeks ago; last week we got it. Still, it wasn’t enough to snap the overall uptrend, nor the spirits of the bulls… traders ended things on Friday in a buying mood, not wanting to head into the weekend empty-handed in case the budget crisis was resolved and/or Europe doesn’t fall into the ocean.
On the flipside, Friday’s strength is far from a sure sign that the worst of any needed correction is over. The current trend is still a bearish one, and we’ve got a ton of data coming up this week – particularly on the real estate and construction fronts – that could make or break this market.
Last week didn’t get busy on the economic front until Thursday, but once it got going it was a whirlwind. Here are the highlights.
* Unemployment claims: New claims made a meaningful dip, from 427K to 405K, two weeks ago. Continuing claims didn’t change much (still at the 3.7 million mark), though bear in mind the continuing claims data is a week behind. The new claims number took a step in the right direction, but one week isn’t a game-changer.
* Inflation: Both ‘regular’ inflation producers (factories and plants) as well as consumers dropped last month thanks to pullbacks in food and energy costs… -0.4% for producers, and -0.2% for consumers. Without those energy and food price dips though, producers as well as consumers aw a 0.3% price increase across the board in June. The ‘inflation rate’ on an annualized basis is now 3.56%, which is tolerable for the economy, but on the upper end of the tolerable range.
* Industrial Productivity: While still reasonably busy, the activity growth pace at U.S. factories is slowing down. The Industrial Productivity Index (Fed’s) only improved by 0.2% last month, and Capacity Utilization once again came in at 76.7%. The Empire Manufacturing Index fell 3.76 points. As mentioned last week, capacity usage and industrial productivity have shown strong correlation with the market’s long-term direction, so to see them stall here should be a worry for buy-and-hold investors.
The rest is on the calendar below.
The biggies on tap for this week include…
* Tuesday: Housing starts and building permits for June; we’re looking for figures close to May’s.
* Wednesday: Existing home sales are expected to be in the 4.9 million (annualized) range.
* Thursday: Let’s see of last week’s big dip in initial claims was a fluke or not; the market’s looking for 411K this time around.
* Friday: The FHFA Housing Price Index will give us a partial idea of how firm the housing market is this summer, though there are no forecasted numbers yet.
Stock Market & Volatility Outlook
Despite Friday’s bounce, the S&P 500 (SPX) (SPY) still fell 27.7 points last week (-2.0%) to close at 1316.14…. just barely back above all the key moving averages after falling under them on Thursday.
That entwinement of all the moving averages, however, is the heart of the story here. For that to happen, the SPX would have to be stuck in the mud. And, it is. We’re back to where we were in late February, meaning five wasted months. Yet, the way all the ceilings (horizontal as well as Bollinger bands) are lining up suggest we’re going to remain in a range until we get an explosive, earth-shattering move to break us out of the rut.
The range is marked n the chart below with dashed lines. There are two ceilings – one at 1358, and one at 1370. There’s only one floor though, at 1260. Note how the 50-day Bollinger bands (purple) are so well aligned with those prior highs and lows.
Point being, these boundaries are very well entrenched. The S&P 500 may bounce around inside this range quite a while before one side or the other is snapped.
Once one edge of the range does break though, look out!
In the meantime/short-run, you may now want to take Friday’s bullish bait until we get some better confirmation that the trend is indeed bullish. Yeah, the CBOE Volatility Index (VIX) gave us a downside reversal and the index itself closed back above all its short-term and intermediate-term moving averages (20, 50, and 100 day), but that was an emotionally-charged rally, and something of a dead-cat bounce. The overall direction here is still a downtrend one, with the SPX having just pulled back from a brush with an upper ceiling and still looking for the lower end of the trading range.
That’s not to say the market can’t go higher this week; there’s a cornucopia of things that could excite investors (a raised debt ceiling, a rebound of the Euro, Italy and Ireland and Greece all win the lottery, etc.) and keep them in a buying mood. None of them are ‘organic’ reason though, and as such, they lack longevity.
And again, barring a positive response to such events, the broad momentum here remains bearish. Let’s check back Tuesday or so.
As always, just for a little perspective you’re not getting anywhere else, a look at a weekly chart of the S&P 500.
This view doesn’t really change much in terms of the outlook – the current trend is still technically bearish, but the SPX is still trapped and a range (1260/1350-ish) no matter where the index goes next.
That said, there is one thing that stands out on the weekly chart that doesn’t readily pop out on the daily chart…. the VIX is starting to trend upward. Granted, the new uptrend isn’t set in stone, and it’s still an erratic reversal at best. If you look at the moving averages though, the VIX is now above them more than not.
This isn’t a guarantee of tough times for the market however, like what we saw in May of last year when the VIX rallied from 18 to the 40’s while the market fell back about 15% — stocks can make progress while the VIX is on the rise. It sure isn’t easy for stocks to do so while the VIX is heading higher though. So, this is something we’ll want to keep tabs on if the market’s over trend is too tricky to pin down.
SPX & VIX Weekly Chart
We’ll cut to the chase on the sector comparison analysis; basic materials (XLB) are rocking again, but only because of gold stocks (GDX), and energy (XLE) is perking up. The financial sector (XLF) is back on the ropes.