Make or Break Time for the Rally – Weekly Market Outlook

Although the bulls fought back pretty well after Friday’s initial bearishness, it wasn’t enough to prevent last week from being the worst week of the year. Of course, it not like stocks were up against any tough weekly comparisons, but still, a 1.0% dip isn’t something to dismiss.

So now what? Well, that’s a great question. While the current trend looks more than a little bearish at first glance, when you take a step back and look at the bigger picture, last week’s dip may have been enough of a pullback to get the market rolling again.

We’ll dissect this tentative in a second. First we need to paint some broad brush strokes.

Economic Calendar

While we may have worked our way through several pieces of economic data last week, not much of it was all that important. On the other hand, the important pieces of information were very, very important…. like Friday’s unemployment numbers.

The good news is, the unemployment rate was whittled down from 7.7% to 7.6%. The bad news is, everyone saw through that “progress”, recognizing that the only reason the unemployment rate fell is because the number of people who consider themselves to be ‘in the work force’ fell significantly, from 155.524 million people to 155.028 million people. That’s a difference of 496,000 people. Granted, the number of people who are technically unemployed fell from 12.032 million to 11.742 million (a difference of 29,000) but the number of employed people still fell from 143.492 million to 143.286 million. That means 206,000 fewer people were working at the end of March than were working at the end of February.

Given all that data, it comes as no real surprise that the government said there were only 88,000 new (net) jobs created last month. That’s well short of the forecasted 192,000 new jobs economists were looking for, and well short of the 400,000 jobs we should be creating each and every month to pull the economy out of its slump. Payroll processor ADP gave us similar numbers earlier in the week, saying there were only 158,000 new jobs created in March, versus a target of 197,000, and a revised total of 237,000 for February. The market never had a chance at anything other than a pullback once the official Department of Labor data came out Friday morning.

Economic Calendar

As for this week, there’s a little less in store, and even less that’s important. The only item that’s going to make a significant impact on stocks is Friday’s retail sales numbers. The pros are looking for little no change, with or without cars. That might be a good thing – if the bar is set low, even tepid growth would be seen as a positive and spur the market higher. Then again, if retail sales should fall short of already-weak forecasts, it could really drop a bomb on the market.

We’re also going to be watching the producer price inflation rate on Friday. It should be tame on a core as well as a non-core basis, but if it rolls in well above or below forecasts, that could have an impact too.

Stock Market

Well, it’s do or die time for the bulls (or the bears, depending on your perspective). After nearly a month’s worth of sideways movement, we’re now at the point where one side or the other is going to have to make a decision.

And which way is the higher-odds direction? There are a couple of good bullish arguments as well as a couple of bearish ones.

The bullish camp will rightfully point out that the intermediate-term support line (red, dashed) that goes all the way back to the mid-November bottom is still intact. In fact, it appears that Friday’s reversal started to materialize right when that rising support line was brushed.

You can also see that all it took was a mere touch of the lower 20-day Bollinger band on Friday to draw some buyers back into stocks.

And, it should be noted that the last two times the S&P 500 (SPX) (SPY) met – and pushed off of – the lower 20-day Bollinger band (in late December and late February) was also the same times the index met and bounced off of that rising support line. In other words, the two have been working together for a while, so to see them working together now implies we’ll get the same result we got the last time these two support levels played together. See the SPX and CBOE Volatility Index (VIX) (VXX) chart below.

S&P 500 & VIX – Daily

The bears, though lacking any decisive technical argument in their favor, will be quick to point out that stocks have soared more than 15% since November. It’s tough to keep tacking on gains when the market’s that overbought. The S&P 500 is now also 7.8% above its 200-day moving average line, which even if an obscure approach is a disparity that historically doesn’t last long.

Just to illustrate how the market doesn’t like to get and stay too far removed from this key long-term moving average, take a look at this weekly chart. Generally speaking, the market doesn’t like to get any more than 8% to 9% away from its 200-day line before reversing course, and an 11% disparity is a very rare and very extreme case.

S&P 500 – Weekly

That rising long-term support line is still quite clear in the weekly timeframe too.

While it seems the bullish case is stronger than the bearish one, it’s still too soon to blindly dive back into stocks (DIA) (QQQ) (IWM) . The S&P 500 needs to push back above its recent ceiling around 1570 before we can say the uptrend has fully renewed. Likewise, the S&P 500 needs to fall under its floor around 1537 (and rising) before there’s any need to get bearish.