Moving Average ‘Death Cross’ – Weekly Market Outlook

It was going to be the second bullish week in a row… a real victory given the current state of the market. Then Friday happened, and yanked the market back into the red for the week (even if just by a little).

No, it doesn’t bode well for the foreseeable future. Before visions of the apocalypse start dancing in your head though, let’s take a step back and look at the bigger picture… beginning with the economy.

Economic Calendar

To say last week was a busy week on the economic front doesn’t do it justice – it was exhausting. We’ll have to just hit the highlights (or lowlights, depending on your perspective) beginning with last Monday’s personal income and personal spending. It’s odd, in that Tuesday’s Consumer Confidence level tumbled to a multi-month low of 44.5.

On Wednesday, the ADP Employment Change figure for August showed the addition of 91K payrolls, yet somehow when we got the government’s figure on Friday, the report was zero (yes, zero) job growth factoring in government workers, and only another 17K new payrolls just counting private employers.

Judging from Friday’s market action, investors chose to see the glass as half empty, focusing on the government figures and not the ADP number. Perhaps it was a letdown after hope that the unemployment trade would at least move a little lower than July’s 9.1%. [Remember, the reaction to the news is at least as important as the news itself.] And just FYI, the new claims figures from Thursday didn’t help or hurt; they were basically flat.

It wasn’t all bad though – the nation’s factories are busy, and busier than expected. Factory orders for July grew by 2.4%, easily topping expectations of 1.8% growth. And, the ISM Index for August came in at 50.6, versus an expected 48.5.

Overall, had it not been for the payroll numbers, the market could have built something on this data. It just takes one bad apple though.

Economic Calendar

As you can see, the coming week should be much less eventful. In fact, with the exception of Thursday’s claims figures and consumer credit levels, nothing else is really a big market mover. Both new and ongoing claims are expected to move a little lower again, but significantly.

Consumer credit levels should increase by $5.0 billion for July, which is a lot (all things considered), but the prior month’s $15.5 billion increase was well beyond forecasts, and implies the purse strings aren’t being tightened that much. It jives with the personal income/personal spending growth, but conflicts with the big dip in confidence.

Almost needless to say, there’s still an element of luck and a little psychology if you’re looking to trade major economic events right now.

S&P 500

All told, the S&P 500 (SPX) (SPY) only lost 2.83 points last week (-0.2%) to close at 1173.97. It only felt worse because we also happened to close 4.6% below the high from Wednesday, and clearly ended things on the wrong foot.

Before you throw in the towel for the long-term though, digest two ideas…

We knew this was coming. As we’ve been talking about for a couple of weeks now, after such a big tumble, aftershocks will happen. We already saw one in mid-August when the S&P 500 moved back to a low of 1121, and the market popped (firmly) out of that dip. It’s just going to take some up and down for a while to burn off all this worry.

While Friday’s loss was a big one (and Thursday’s wasn’t small), there was NO volume behind it – it was the lowest volume day in weeks. The implication is that this is NOT the majority opinion. That’s not to say the majority of the market isn’t bearish right now; it’s simply to acknowledge we don’t know.

On the other hand, while the market isn’t back in dire straits just yet, we’re not necessarily out of the short-term woods either.

There are a couple of potential landing points for this pullback. One is the rising support line (orange) around 1140, that traces the major – and rising – lows over the course of this recovery effort. That may not be the most meaningful one though. That honor still likely belongs to the horizontal support around 1121 (gray). There’s a slight incline with it, but not enough to bother pinpointing just now. That was the floor for most of the bottoming process in early August, and the rally point for the mid-August bounce. So, we’ll draw our line in the sand there for now.

SPX & VIX Daily Chart

While anything’s possible, another part of the reason we’re still leaning on the bearish side of the fence is the CBOE Volatility Index (VIX). While it did move higher as it should have in the latter part of last week, it has yet to retest its upper Bollinger band or its falling resistance line (orange). It’s done one or the other with the market’s last two short-term lows, but isn’t anywhere near either ceiling now.

Simply put, fear has NOT peaked yet, and until it does, we’re just not likely to have made a solid and trade-worthy low. [Note that the 1120 mark and the VIX’s ceilings may not be brushed at the same time; this is still a day-by-day journey.]

Oh, and by the way, we just got one of the so-called “death crosses”… the 50-day moving average line (purple) is now under the 200-day average line (green). The SPX is the only index to have committed this crime so far, and it’s not as if these signals are always right. Still, it’s not exactly an optimistic hint.

And how do things change when we zoom out to weekly chart? Actually, this is one of those rare instances where one chart doesn’t tell a slightly different story – even in a different time frame – than the other one… though this one is a little more readily alarming than the daily version. It’s here where the moving averages show just how bearish the momentum has become, which is underscored by last week’s hammer-shaped (upside down) action.

It wasn’t something we had planned on saying, but since it presented itself to us we may as well make it clear now – until the 200-day moving average line is re-crossed, ANY bullish effort will be suspect from here. That’s not to say we don’t foresee any bullish swing from here. In fact, we see a few trade-worthy bounces ahead. Now that we have the death cross though, we can’t depend on any of them being the re-entry into bull-market mode.

SPX & VIX Weekly Chart

Trade Well,

Price Headley