Bulls Have The Edge Here – Weekly Market Outlook

Stocks closed higher by 0.8% last week, but the number doesn’t really do the move justice. The market also rebounded 3.0% off of its low, much like it did the week before.

The source of the volatility – and accompanying indecision – is mostly Greece and Europe. That’s been going on for weeks though, and will likely continue on for weeks – we have to look beyond that now, faithful that (1) the worst-case scenario is now baked in, and (2) that some sort of intelligent resolution will be introduced eventually.

In other words, traders can no longer speculate solely on that debacle… we have to start looking at the bigger picture, and interpreting things as we see them rather than how we think things should be.  And yes, that includes economic numbers as well as the market’s action. Wit that in mind…

Economic Calendar

Not a whole lot going on last week in terms of economic numbers, but a couple of key items were posted. Consumer credit was one of them.

As you may recall, the combination of revolving and non-revolving credit has been swelling all year long (well above assumption in most months of 2011)…. until August, when a suddenly-terrified consumer – and lenders – put the brakes on and contracted the total credit market by $9.7 billion [the first contraction in many months, and a stunningly big one at that].

Well, for September, lenders and spenders were back to their old ways, realizing the earth didn’t spin off its axis and out of its orbit after all. Consumer credit improved by $7.4 billion, offsetting the bulk of what was lost in August. We’re still not back to peak levels, but things certainly couldn’t have gotten worse in October.

The other ‘big deal’ from last week came on the unemployment claims front; it was good.  Initial claims rolled in less than 400K for the second week in a row, with the number falling from 397K to 390K. Continuing claims fell from 3.71 million to 3.61 million.

It’s still not ‘strong’, and the ongoing claims figure ignores the fact that it excludes those who are on extended emergency benefits.  Still, it’s a hint of progress.

Economic Calendar


 The coming week is chock-full of stuff, with inflation at the forefront. The PPI number for October will be unveiled on Tuesday, while the consumer inflation number (CPI) – ‘the’ inflation rate – will be unveiled on Wednesday.  On an annualized basis, the former is at a whopping 6.9%, while the latter is at 3.87%.  Both are getting to the point where they could be stifling [though bear in mind producers absorb inflation a little better than consumers do].

We’re also getting two big-time numbers on Wednesday about industrial activity. Industrial production is expected to have ticked higher (month-to-month) by 0.4% for October, and capacity utilization should have improved to 77.6% from 77.4%. They’re important numbers just because the correlation between them both and the long-term market is stunningly high. If both even just inch higher, that’s good for stocks.

Finally, later in the week (Thursday) we’ll start to get a barrage of housing and real estate data. Most of it comes next week, but later this week we’ll hear about housing starts and building permits for October. Both are expected to come in at 603K…. which is lower for starts, and better for permits, when compared to September’s numbers. Either way, the levels themselves are still a ‘just mediocre’ proposition.

S&P 500

It’s clearly a case of more good news than bad. Stocks can take a hit – a la Wednesday’s 3% plunge – but they rebound pretty well. That’s been the case for well over a month now.  Better still, these rebounds are happening in all the right places…. former resistance lines, and key moving averages.

For the S&P 500 (SPX) (SPY), the big moving average line in question is the 100-day line at 1228 (gray), and for the most part the former ceiling at 1230. Last week’s low was around 1227, from Wednesday and Thursday, but there was never any firmly-developed threat of a major pullback was unfolding.

Indeed, about the only thing we’ve seen happen over the last two weeks of any significance is a consolidation phase — though that may ultimately be a good thing, if it can slingshot the SPX above and beyond the 1291 level in the same way that early October bounce was a slingshot-effect out of the last of the nasty dips.

And no, that 1291 mark wasn’t pulled out of a hat. That’s about where the S&P 500 peaked back on October 27th – before a sharp 5.6% dip – and it’s where the upper 20-day Bollinger band line is now.

And as you’ll see with the chart below, these short-term Bollinger band lines have been nothing to doubt, bullishly or bearishly. Most every major reversal since August has happened when a Bollinger band line was brushed, or even just toyed with. So, prudence says we respect the potential headache at 1291 now.

Conversely, until the floor at 1227 breaks, we don’t really have a lot to worry about either.

What about the CBOE Volatility Index (VIX) (VXX) (VXZ)? Yeah, it’s sort of pointed lower now (as of the last two days) after Wednesday’s collision with its upper 20-day Bollinger band at 36.4, which would normally be bullish.

More than anything else right now though, the VIX is just listless and undirectional, bouncing around and leaving behind more than a few gaps.
Generally speaking, it’s trending lower, as we can see both of its Bollinger bands moving to lower levels. It’s a half-hearted, circumstantial move lower though, and doesn’t really say confidence behind the recent bullish efforts is high.

SPX & VIX Daily Chart

SPX Chart 

Bottom line? The bulls have an edge here, so we’ll lean that direction. There are still a few things the bulls need to prove though. The good news? There’s fundamental support for that strength (far more than was expected six weeks ago before earnings season started).

Q3 Earnings Results… Almost Done

Since we opened this can of worms a couple of weeks ago, we feel compelled to stick with it through the end. T hat won’t be much longer though, as 91% of the S&P 500’s companies have posted their third quarter earnings results.

The score so far?  Solid. The average year-over-year change is a 16% improvement, with 315 beats and 95 misses (and 43 meets). That’s a beat/miss ratio of 69%/21%, which is about average.  As of the last look, the S&P 500 is going to ‘earn’ $25.50, which is better than the expected $25.07 from just a week ago, and way better than the expected $24.17 from six weeks ago.

Trade Well,

Price Headley