Weekly Market Outlook

Happy Halloween everybody.  Hopefully the market has a treat for you rather than a trick, though after the 17% runup over the past three weeks, there’d still be little to complain about after a small dip.

Of course, ‘small’ is the key word there.  A small dip would be normal and healthy, and not necessarily undo the big technical progress that was made last week.  A larger dip would deflate a bubble at the very point in time the bulls least wanted to see it happen… right as the market was truly pulling out of a rut.

We’ll do the analysis below (as usual) right after a look at the overarching economic numbers.

Economic Calendar

The market managed to rally last week despite weak economic data – not because of it.  Confidence plunged (though in some regards that could be a contrarian bullish sign), spending was up while incomes weren’t, and real estate activity appears to have slumped.

Let’s just start there… on the real estate front.  Though new homes sales ticked forward to an average annual sales rate of 313K, pending home sales fell 4.6% for September.  Both the FHFA as well as the Case-Shiller home price indices [for August] moved lower.

Productivity-wise, durable orders slumped 0.8% last month, though they did improve 1.7% when taking cars out of the equation.  And Q3’s GDP was waaaaayyyyy better than anyone had foreseen, growing 2.5% after Q2’s pathetic 1.3% improvement… the low score that really kick-started much of the recent market weakness.

As for the health/status of consumers, this was a mixed bag as well.

Consumers say they’re worried to death, via the Conference Board’s consumer confidence reading reaching the lowers level (39.8) it’s seen in more than two years; the media has been quick to point out it’s the lowest confidence reading since March of 2009.  What all of you know about that date, however, is that it was also the end of the bear market and the beginning of the bull market.

While confidence measures can always move lower, this particular plunge comes against the backdrop of clearly-better-than-expected economic activity (a la GDP), and consumer spending that ramped up 0.6% in September, even though personal incomes were only up 0.1%.

Granted, the income/spending numbers were for September while the consumer confidence readings were for October, and a lot can happen in the meantime.  But, not a lot of detrimental stuff appeared in the meantime.  In fact, the market – the best confidence barometer of all – soared in the meantime. We’re actually a little more inclined to view the plunge in confidence in a contrarian light.

Economic Calendar

The coming week will be just as busy, especially in terms of industrial activity and employment.  Though ADP says October’s payrolls added should be higher than the prior month’s 91K, the government says private payrolls added for October should fall from September’s 137K; the expectations are 100K and 114K, respectively.

The big enchilada, however, comes on Friday when we get October’s unemployment rate.  The pros are looking for 9.1% again, which given all the data is a very reasonable guess.

There’s a lot of other data in the lineup as well, though a great deal of it is just fluff that really doesn’t move the market (at least not in a major way).

S&P 500

Well, as stunned as some people have to be about it – and in some ways this includes us – the market flew right past key technical ceilings around the 100-day and 200-day moving averages at 1230, and didn’t really look back.  All told, the S&P 500 (SPX) (SPY) advanced 3.8% last week… the fourth consecutive weekly gain.

So is this move the ‘bear killer’ that October is so well-known for creating?  The fact is, we still don’t know yet.  It’s easy to be bullish on the way up, but will the bulls be in the same mood at the first sign of trouble?

From here, the bulls really need to halt any pullback from the S&P 500 at 1230 or higher.  That’s where the 100-day and 200-day averages still are, and that’s where the big horizontal ceiling for the SPX has been since late August.  Given how prior resistance tends to become support (and vice versa), that’s a huge line in the sand now that it’s been hurdled.

That’s not to say it’s the only way the new uptrend can stay alive though.  If we see a decided rebound effort above the 50-day average at 1186.30, then the uptrend is still intact.  It would just mean so much more if it happened above 1230.

The X-factor here is the CBOE Volatility Index (VIX) (VXX) (VXZ), surprise surprise. T he bulls did want it to move under a major floor at 30.0, and it did.  The problem is the way it did so.  It left behind a big gap on Thursday with the move from 29.86 to 25.46.  Were it a gentle slide under 30, we may be able to have confidence that there was room for follow-through.  Between the VIX’s gap and the SPX’s 3.4% pop that day, it’s tough to imagine there’s any meat left on that bone… at least none that can be torn into right away, from an overextended state.

So, let’s see how this continues to unfold here before making any assumptions.  The whole apparent resolution to the European debt crises appears resolved on the surface, but when you look under the hood it becomes clear the only thing these guys did last week was delay fixing the problem.  Once the market figures that out, it’ll be up to earnings and economic strength (more evidence that Q3’s GDP growth was for real) to buoy stocks.

SPX & VIX Daily Chart


We’ve been taking a step back and looking at a weekly chart of the S&P 500 over the past several weeks, primarily to put things into a bigger-picture light.  After this past week, the strength has really started to change the look of the market’s landscape.  We ARE over the hump.  In fact, we’re closer to the top of 2011’s trading range than we are to the bottom of it.  Though the pace has been blistering to the point where it seems unsustainable, the heavy lifting does indeed appear to be done – now we just need to cement it all in place with a few days of no worse than sideways movement or small pullbacks.

One thing the weekly chart suggests to that end is strong buying volume over these past four weeks.  That still doesn’t make the rally bulletproof, but it affirms that the buying interest here is legitimate.

We’re going to go ahead and play the optimist’s role here and assume that somehow the market’s going to build on the bullish foundation that’s been laid here.  As such, we now have a broad (and intermediate-term) upside target of 1370 for the S&P 500… the level at which it’s most likely to hit a significant headwind.  That’s where the upper Bollinger band is, as well as the ultimate peak from May.  Just don’t assume we’ll get there in a straight line.

The market’s peak will likely coincide with a major bottom for the VIX, which shouldn’t happen until it gets closer to the 15 area, where the VIX found a floor in the earlier half of the year, and where the lower Bollinger band will be by the time it could be intercepted.

SPX & VIX Weekly Chart


Trade Well,

Price Headley