Weekly Market Outlook — Non-Disaster Economy, Trading Range, & More

Depending on which index you primarily follow, last week was either the worst week since 2008, or just one of the worst. For the Dow, the 6.4% dip was the biggest since October of 2008, while the S&P 500’s 6.5% selloff was just one of the worst in a long, long time. No matter how you slice it though, last week was just really bad.

True to its recent schizophrenic form though, just when things seemed their darkest on Thursday, the bulls stepped in on Friday to stop the bleeding.

Can they build on the effort this week and push stocks back up to the upper edge of what’s becoming an intermediate-term trading range?  Hey… it’s happened three times in a row already; what’s a fourth time? We’ll detail the odds in a second, right after we examine the economic numbers that will either maker or break the market’s current trend.

Economic Calendar

We didn’t get a ton of economic data last week, but what we got was important – especially on the real estate front.

In a nutshell, while things like home prices, lending activity, and construction are not really getting better (in the bigger picture), they’re not getting worse either. Don’t let the media tell you differently

In fact, there was something of a bright spit of real estate in last week’s data… existing home sales increased to an annualized rate of 5.03 million, up from July’s rate of 4.67 million. It wasn’t entirely induced by distressed asset and bankruptcy sales either; those numbers actually fell under the recent norm.

Point being, it may be ugly, but we’re slowly getting out of the hole.

The only other major news came on the jobs front, and though it was superficially seen as encouraging, it really wasn’t all that great.  Last week’s initial claims fell from 432K to 423K, but anything above 400K is still stifling.  Continuing claims fell from 3.755 million two weeks ago to 3.727 million… technically an improvement, but nowhere near ‘good enough’. 

Economic Calendar

The coming week is a little more loaded, with plenty more housing and real estate data packed in. 

The week kicks off on Monday with new homes sales; look for a slightly lower annual rate of 293K. The Case-Shiller Index is expected to show a 4.5% increase on Tuesday, but pending home sales are expected to have sunk by 1.3% for July… an admittedly dated figure, however.

Last month’s big-ticket factory activity is expected to have fallen too, though we’ll know for sure on Wednesday when we get durable orders numbers for August. Total orders are expected to be flat, but when you take automobiles out of the equation, orders are actually expected to fall 0.2%.

Nevertheless, consumer confidence/sentiment is expected to be a mixed bag as well, with Wednesday’s Consumer Confidence (Conference Board) expected to rise from 44.5 last month to 46.7 this month. On Friday, the Michigan Sentiment Index for September is expected to rise from last month’s 55.7 – the lowest level since late 2008 – to 57.6 for September’s final reading.


Nobody needs to act surprised that stocks fell back early last week. Likewise, nobody needs to act surprised the market staged a rebound effort on Friday.  The chart below explains exactly why, even with just a quick glance.

Folks, we’re range-bound, pure and simple. The floor’s at 1120 and the ceiling’s at 1220.

Oh, those boundaries aren’t set in stone. For instance, the S&P 500 Index (SPX) (SPY) hit a high of 1231 in early September, and the upper 20-day Bollinger band is now at 1236.  So, you could make a decent case that there’s a ceiling just above 1230. In the same sense, the SPX only hit lows of 1136 (blue) in the early part of September, which is where the lower 20-day Bollinger band is currently resting. 

It doesn’t change the basic premise though….the market’s just bouncing around between support and resistance.

SPX & VIX Daily Chart

A couple more things to note about the daily chart ….

(1) While Friday’s buying volume wasn’t as strong as Thursday’s selling volume [an impossible hurdle], it was stronger than average – especially for a Friday, and

(2) the CBOE Volatility Index (VIX) (VXX) is being capped at a known ceiling of its own (43.80), and its upper Bollinger band is also proving to be a resistance level.

The only thing the bears need to fear here is a move under 1220 from the S&P 500, and/or a move above 43.80 from the VIX. And yes, we understand that’s a little like saying "if it’s rising it’s bullish and if it’s falling it’s bearish." Those are THE make or break lines right now though, and the importance of each can’t be overstated.

Anyway, we know we’ve been logging the ‘bigger picture’ movement of the market every week for several weeks now via a weekly chart, but for some reason this week’s weekly chart really underscored one thing … there’s a massive amount of room to recover, and the bulls are working harder than it may seem to make that happen. The support around 1120 is a former ceiling, and this is not the first time the VIX has danced with resistance at 43.

While it’s not clear when – or even if – the S&P 500 will push itself up off the mat, one thing is sure … once that bullish ball gets rolling, it’s going to roll fast. The initial upside target for such a breakout is around 1340, and the VIX could keep falling all the way back to 15.

That’s a big ‘if’, but in the grand scheme of things we see that as the more likely scenario AFTER we shrug off the lingering volatile.

SPX & VIX Weekly Chart

Style/Cap Performance

Finally, it’s been a while since we’ve taken a comparative look at the market’s major market cap and style groups, primarily because there was little point in doing so – they were all getting trashed. With the bleeding mostly stopped now though, spotting market cap and style leadership is a worthy exercise again.

On the performance chart below, we’ve proverbially started the clock at July 7th’s peak. While all the major groups were in the same bearish boat and lost the same amount of ground in late July and early August, we’re starting to see a divergence again.

Don’t be misled there…. on an absolute basis, they’re all still struggling. On a relative basis though, it looks like pockets of strength are starting to form. That’s at least the beginning of a "stock pickers" environment. While the chart still isn’t all that helpful after last week, it’s getting there, and we want to plant this seed now so you know where it’s coming from the next time you see it (which may well be next week).

The only take-aways for now are still important ones though – there’s clear relative strength with growth stocks (and that is surprising), and there’s clear relative strength with large caps (which is also a surprise).

Market Cap/Style Performance Since July 7th

Trade Well

Price Headley