Will The Market Rally Gain More Traction – Weekly Market Outlook

Friday ended up turning what was going to be a losing week back into a winner, carrying the market to new multi-week highs in the process… an unexpected event, particularly for a Friday.

The question is, of course, does that break above the market’s key ceilings indicate we’re finally out of the rut, or is this just a head-fake being served up by the European Union summit that’s only designed to drop us from a slightly-higher height?

We’ll weigh the odds in a moment. First (and as usual), we’ll start with the macro picture and look at the recent key economic numbers.

Economic Calendar

It was a busy week last week on the economic front, and a mixed one to boot.

The really good news is, capacity utilization and industrial productivity were solid. Not great, but solid. As we said last week, there’s a strong correlation between those data sets and the longer-term market trend. As long as utilization and productivity are positive, the market remains in the hunt.

Very good news on the housing front. The housing market index soared from 14 to 18 for October, and housing starts jumped from 572K to 658K in September (though permits slumped from 625K to 594K). Existing home sales fell from a rate of 5.06 million per year to 4.91 million per year in September.

And inflation? For consumers as well as producers, it’s stable, but still elevated. The current inflation rate is 3.87%, which is as high as it’s been since 2008 – right before the meltdown. The high-ish figure is drawing a lot of criticism, but it’s not a level that’s been historically debilitating. The producer inflation rate now stands at 6.9%, which is again on the high side, but not stifling.

Economic Calendar

As for the coming week, we’re getting more data about the housing market.  The Case-Shiller index is expected to show a 3.5% dip in home prices when it’s released on Tuesday, though bear in mind that’s a figure for August. There’s some more housing data on Tuesday and Wednesday, with a biggie – new home sales – coming out on Wednesday. The pros are looking for an annualized rate of 300K, which is slightly higher than August’s rate. Thursday’s pending home sales will round out the picture; look for a slight dip of 1.0%.

On Thursday and Friday we’ll have a better feel for the health of the average consumer.  Incomes and spending should have improved for September, up 0.3% and 0.6%, respectively.

A lot of eyes and ears will be waiting on Friday’s Michigan Sentiment Index (the final score for October), but don’t sweat it. It’s the third update for the month, and bluntly, there’s not a strong correlation between it and the stock market.

Stock Market

Friday’s 22 point gain from the S&P 500 (SPX) (SPY) led to a 13.67 point, 1.1% gain for the week, leaving the S&P 500 at 1238.25. It was the best close since early August, but more than that, the move carried the SPX above several key technical resistance lines. In a normal environment, this would be bullish. We’re not in a normal environment though. We’re still being bumped around by the echoes of recent volatility, and it’s difficult to trust clues that we would normally trust.

To be specific, the S&P 500 simultaneously cleared the 100-day and 200-day moving average lines at 1233; it’s the first time the index has been above either since August 1st. Considering it’s the grandmother of all technical signals, the event is nothing to ignore. Volume has been getting progressively better on the way up as well.

Here’s the problem – we’ve seen similar pushes several times since early August, and none of those actually took the SPX meaningfully higher. What makes this one different?

On the other hand, the range-bound trading has to end sometime, and October usually is a bear-killer (and Q4 usually is bullish). If there was ever a time for a recovery effort to actually get traction, this is it.

Translation: We’re trapped between likelihood and believability.

And make no mistake – the only thing that sparked Friday’s strength was hope surrounding this past weekend’s summit in Europe. It’s not (shouldn’t be, anyway) a good enough reason to spur stocks upward, as even a definitive solution to the continents banking worries still doesn’t mean they can be executed or effective. Anything less than 100% perfect belief in the summit’s outcome could send the market lower again after getting into this vulnerable position.

So, here’s where we are…

Before getting on the bullish bandwagon, we want/need to see how investors respond to another round of selling (it’s easy to be bullish while stocks are on the way up).

If stocks immediately pull back under 1221 – or even under the 20/50-day average lines at 1178 – it’s a pretty good bet we’ll at least get close to retesting the lows we were hitting in August and September. The last thing investors are interested in now is sticking around and risking that this bounce is going to be yet-another failed rebound effort. Ironically, that throwing-in of the towel is what will exacerbate the very pullback traders are fearing.

Even if stocks continue to rally though, it still doesn’t solve the problem of knowing how investors are going to respond to the first sign of weakness. If we are seeing bullishness by the time you’re reading this, it won’t mean much unless the S&P 500 can actually survive a pullback and revive itself at least above the 1221 level.

That’s it. We know this week’s look was a lengthy one, and not even all that conclusive when it was all said and done. That’s a testament to the fact that we’re at a key pivot, and the true undertow is very unclear. We’ll know for sure by Wednesday or so, once the market has had time to digest the European summit.

SPX & VIX Daily Chart


Dow Jones Industrials/NASDAQ Composite

Just in the interest of completeness, we also want to show you Dow (DIA) and the NASDAQ (QQQ). They’re pretty much telling the same story, but with a couple of other nuances.

For starters, neither has yet to clear their 200-day moving averages (though both are within striking distance).  Both indices, however, closed above their prior highs made after the August implosion.

Same deal here… we need to see either index survive a pullback above key support levels or prior resistance levels.

Dow Jones Industrials/NASDAQ Composite – Daily

Trade Well,

Price Headley