October May Bring Light To The Market’s Tunnel – Weekly Market Outlook

Not only was it the first winning week in the last five, it was the biggest winning week in the last eight. Oh, it still came nowhere close to undoing the damage/carnage seen over the prior four weeks – a 16.5% drubbing – but it’s at least a sign that not all hope is lost.

What’s interesting is that the rebound unfolded despite rather weak economic data. That in itself is a bullish red (or should we say green) flag, as the response to the data rather than the data itself can offer glimpse of how investors are thinking.

That said, let’s start there… a look at last week’s economic numbers and what’s in the lineup this week.

Economic Calendar

It was a light week last week in terms of quantity, but the impact of what we did get was big.

The bad news: New home sales fell back to a near-record low pace of 298K last month, and as it turns out, GDP growth for Q2 was even worse than first thought… only 1.0%, rather than 1.1%.

The good news: Durable orders soared 4.0% in July, after falling 1.3% in June. Even without autos, orders topped expectations by growing 0.7%.

The non-news: Initial unemployment claims were cranked up from 412K to 417K, which is a step in the wrong direction. There’s a big footnote with that number though – it includes thousands of Verizon employees who went on strike (at least 20,000 over the prior two weeks). These claims will not be granted, and really shouldn’t even be counted. Taking them out of the equation, initial unemployment claims for the last two weeks were 399K then 408K. [The magic number for job growth is still 375K, by most estimates.]

Economic Calendar

As for the coming week, there’s a whole lot on store…. far more than we can detail. In fact, this may be the most loaded week of the year so far. The biggies to watch for:

* Monday: Personal income and personal spending. Both should be up modestly.
* Tuesday: Consumer confidence. August’s Michigan Sentiment Index was up a tad, in line with expectations.
* Wednesday: An early glimpse of what to expect when we get Friday’s payroll change numbers; the Challenger job cuts and ADP Employment change are due.
* Thursday: We’ll get the unemployment claims numbers as usual, but auto sales figures are also in the lineup. No forecasts available yet. 
* Friday: Brace yourself – this is a huge day on the jobs-data front. Payrolls change (jobs created) and the unemployment rate are going to be announced. The pros are looking for another weak jobs-created number, and no change in the 9.1% unemployment rate. There’s little room for disappointment here.

S&P 500


On close-to-close basis, last week’s gain was almost a mirror image of the previous week’s loss. The S&P 500 (SPY) (SPX) rebounded 53.27 points (4.7%) to end the week at 1176.8. Volume wasn’t bad either. It wasn’t great, but it wasn’t bad.

Of course, the question on everybody’s mind right now is whether or not the bulls have any gas left in the tank? The answer is ‘probably’, though even that non-committed answer needs some caveats.

The bulls are building on a combination of foundations here, most all of which stem from a sheer oversold condition. Clues we’ve seen so far are higher lows since the early August low of 1101 (see the orange and gray support lines), and the fact that the CBOE Volatility Index (VIX) (VXX) (VXZ) has matched that effort with a string of lower highs. More than that, the VIX has some room to move lower – while the market moves higher – before hitting its lower Bollinger band at 22.30.

That said, anything that falls 16.5% in just four weeks is apt to bounce, so don’t start letting that bullish euphoria sink in just yet.

In fact, though the momentum is bullish until it isn’t (seriously), we can’t expect meaningful bullish progress from here for a few more weeks.

See, not only are the bulls fighting doubts about the market, but they’re also fighting the calendar. When combined, the drag they can collectively have on the market is just too much to expect significant upside.

Generally speaking, late Summer (August) and early Fall (September) are slow-to-bearish for stocks anyway. Factoring in a massive correction as well, there are few players who want anything to do with the market until it’s CRYSTAL clear we’re out of the woods. Given how long it took to overcome the fallout from last year’s Flash Crash [which in no way at all crimped earnings growth, but crimped stocks for several weeks], it would be wrong to assume a quick recovery could be mustered now.

The approximate end date of tepidness and the beginning of a "light at the end of the tunnel" mentality? Most likely it will be into October, which also just happens to be when the calendar finally starts to work in the market’s favor again.


In the meantime (and this was the point of the background), we can expect more whipsaws like this one… in both directions. It took four major lows to work through the post-Flash Crash rut, and it’s taken four major bottoms to work through other dead periods for stocks as well. We’ve really only seen one or two so far. That’s not to say four is the magic number. Maybe it’s three, and maybe it’s five. The point is, don’t get overly excited about any rallies, and don’t get overly discouraged by pullbacks. Rather, count on volatility. In fact, you may want to play it.

In the very near-term, the S&P 500 is on the verge of getting back above the 20-day moving average line (blue) at 1181. If it’s hurdled, that should prod the bulls quite a bit, though 1204 is still a ceiling to contend with. At the other end of the spectrum, 1120 is the make-or-break floor.

SPX & VIX Daily Chart

It still doesn’t mean a lot yet, but after last week’s bullishness, the bigger-picture weekly chart of the S&P 500 is at least worth putting back on the radar. What becomes clear here is two-fold: (1) the past three weeks have actually been a consolidation phase, which will ultimately act like a slingshot, and (2) three weeks ago may have been a capitulation. Volume soared to Flash Crash levels, and the VIX spiked to its Flash Crash high. Both are clues that the worst could be over.

On the flipside, the point we made about the post-Flash-Crash lull also becomes clear with the weekly chart. Though the VIX subsides and the sellers eased up by June of 2010, the market didn’t actually begin to recover until early September…more than four months after the early May plunge.

This year, weakness also started in early May – it just didn’t get nasty until early July. While the worst may still be over, history says to look for aftershocks.

SPX & VIX Weekly Chart

Trade Well,

Price Headley