Whippy Volatility Will Continue – Weekly Market Outlook

Though the market still closed lower again last week, on a net basis, last week’s losses weren’t nearly as harsh as the prior week. All told, the market lost about 1.7% over the past five trading days, though it had been in the hole as much as 8.1% at one point last week. Some decent/hopeful economic data was given credit for the intra-week rebound, though we may have been due for a ‘dead-cat bounce’ no matter what.

Will any reason for a rebound last week be enough to spur stocks higher this week, or was the bounce just a little volatility that’s going to swing back the other way now? We’ll look at the upside and downside in a moment, after we explore the key economic numbers.

Economic Calendar:


While the bears milked the poor economic number early in the week, the bulls pulled the same stunt when good news came out Thursday and Friday.

On Monday we learned Q2’s productivity slumped 0.3%… far worse than previously thought. Unit labor costs grew, and the Fed’s willingness to be as dovish as possible simply confirmed the worst fears. That kept what few buyers there were on their heels through Wednesday.

By Thursday though, even a little good news went a long way. The bulls were in charge from that morning on, initially fueled by semi-encouraging regarding unemployment claims – new claims had fallen under the all-important 400K mark (395K). Continuing claims from two weeks ago also fell by a decent amount. It’s still not a full or fair picture of the total unemployment situation, but it was good enough for investors Thursday.

Strong retail sales for July pushed the bulls’ buttons a little more on Friday; with or without automobiles, retail sales rose 0.5% last month. Topping expectations, it hints that perhaps the consumer isn’t as dead as he/she is made out to be right now.

Yes, the initial reading for August’s Michigan Sentiment Index plunged to 54.9. If that weakness persists long enough to become a trend, that will bode poorly for stocks. However, the Michigan Sentiment Index often acts as a contrarian indictor… consumers are least optimistic at market bottoms and the end of economic lulls.  It’s too soon to say that’s what this is (and it’s a long-term tool anyway, and not a short-term clue we need right now). We will be monitoring it, and sharing results as needed.

Economic Calendar

As for the coming week, it’s a biggie… particularly on the construction/real estate front, and in terms of inflation.

Housing starts and building permits are both expected to have fallen in July, but not tremendously [both should remain above 600K]. We’ll know for sure Tuesday.

Wednesday will be a much more important day for long-term investors than anyone may realize. The two data sets being released that day – capacity utilization and industrial production – have shown tremendous long-term correlation with bull and bear markets. Both grew firmly through 2010, but have flattened over the course of 2011. Neither has contracted yet, but both are walking a fine line.

On Thursday and Friday we’ll get a better feel for inflation… consumer as well as producer.  Though it’s been on the rise for about a year, it’s yet to reach rampant levels feared more than a year ago.  In fact, the only inflation we’ve seen so far has been healthy, normal inflation.

Stocks & Volatility:


By and large, the conventional; technical analysis tools went out the window two weeks ago. The moving average lines – all of them – are distantly in the rear-view mirror, and even the Bollinger bands are mostly out of play here (though that changed modestly on Friday).

In other words, we really are in uncharted territory in terms of figuring out where the market might go next.

There are some subtle hints, however… and the bulls may not ultimately like them. 

On the upside, the S&P 500 Index (SPX) (SPY) fought its way back inside its lower Bollinger band (50-day) at 1174 before the end of the week last week. Given how oversold it was already, this action may be enough to inspire a little more buying this week. Simultaneously, the S&P 500 index managed to get over last week’s technical hump at 1172 (dashed).

There is a problem with recent bullish effort though – it lack volume. While the market was making progress Thursday and Friday, volume was fading on the way up. If this rally is to have any meaningful longevity at all, it needs more buyers than this.

S&P 500 – Daily

The bulls may also point out that the CBOE Volatility Index (VIX) (VXX) (VXZ) has fallen back inside its upper band line, and is now moving lower. And sure enough, it is.  The shape of its bar on Friday hints of the same problem the SPX’s has…. what little bullishness there was mostly faded Friday afternoon, as both the S&P 500 and the VIX were reeled in from their respective moves.

Point being, we’ll also need something more convincing about the bullish effort than this before sinking our teeth back in.

Funny thing though… the daily chart of the S&P 500 doesn’t look all that impressive for the bulls, the weekly chart actually offers several bullish arguments.

The biggest one is that we’ve made a full (and near perfect) 38.2% retracement of the span between March-2009’s lows (666) and April’s peaks (1370). Fib lines are natural, or ‘organic’, reversal and extension points that generally start and stop rallies or pullbacks. It’s more than a little interesting how the dip to 1101 is essentially a perfect retest of a major Fibonacci line, as if on cue.

Also, though it didn’t end the week on such a bullish note, the VIX peaked at 48 last week just like it did with the flash crash in May of 2010. While that wasn’t the ultimate low then, that was close to the end of the violent selling.

S&P 500 – Weekly

Implications? The rectification of a weaker-than-seems daily chart and a more-supported-than-seems weekly chart is simple enough.

From high to low, the market has fallen 18% over the past three weeks. That’s more than enough to qualify as a ‘normal’ correction, even if it felt like anything but normal at the time. So, the worst of any overdue selloff is now likely under our belt.

That doesn’t mean the bears aren’t going to take a few more swings though. It took three really nasty dips to finalize the post-Flash-Crash correction; we’ve really only been through one so far this time around. Any subsequent pullbacks from here may or may not drive the market to new lows, but it’s unlikely any new lows will be significantly lower.

In other words, we’re gearing up for volatility in both directions. We’ll know the worst is over when we finally start to see higher volume on the way up following lower volume on the way down. It may take until the end of September to work through that ebb/flow action though. Trade Well,
Price Headley