Wow. Even the bad days aren’t so bad in the current environment. After four straight gains over the course of the first four days of last week, what started out as a pretty bearish day on Friday turned into only a modest loss for that session – the S&P 500 (SPX) (SPY) only closed 0.3% lower on Friday. When it was all said and done, stocks gained about 2.3% last week.
On the surface, the move itself suggests bullish momentum is at hand, as does the 16.7% rally over the past 21 weeks. The fact that the market shoved its way into all-time high territory is also superficially bullish. Sometimes when things look as enticing as they do now, however, it’s the perfect opportunity for stocks to sucker-punch unsuspecting bulls.
So what’s it going to be this time around? We’ll make the call in a moment, right after poking and prodding the major economic numbers for last week.
Although the schedule of economic data was full for last week, not much of it was terribly important. In fact, it wasn’t until Thursday we heard anything worth a second thought.
That biggie on Thursday was the prior week’s unemployment claims. You may recall with last week’s commentary that the surge in claims (from 357K to a multi-month high of 385K) was seen as a terrifying indication of economic weakness. As it turns out, it was just a blip. New claims fell back to 346K last week… back to the recent norm. And just for the record, ongoing (or continuing claims) have barely budged during any of the disruption of the new unemployment claims trend. The bottom line is, the numbers are still getting tepidly better.
The only other item of interest last week was Friday’s retail sales. They fell 0.4% in March, whether you include automobiles in the equation or not. While it would be premature to say one month’s data is a sign of impending doom, it does give reason for concern.
The coming week is also a busy one on the economic front, but once again there’s not a whole lot of information we’re getting that we actually need to worry about.
Tuesday’s housing starts and building permits, of course, will be well-watched. Starts are expected to reach a pace of 930K, up from 917K in February. Permits should roll in flat, from February’s pace of 946K to 945K this time around. We’ve been applauding the strength of the rise in both numbers, but we’re now at the point where we have to wonder if the uptrend will have to start slowing. We’ll see (and we’ll plot a chart for you with next week’s update).
The only other heavy-hitters this week are also being unveiled in Tuesday – March’s industrial production and capacity utilization. Any increase in both or either numbers is technically a good sign for the long-term market.
The overall uptrend may still look healthy on the surface, but the fact is – under the hood – things are actually getting quite messy.
As alarming as Friday’s modest dip may have been, know that it happened right where it should have…. at the S&P 500’s upper Bollinger band(s). It could take a while for the bulls to decide if they’re going to push past this ceiling. Or, they may simply decide to slowly trace the upper Bollinger bands higher, as they did in January. That may be a slow, grinding gain, but a gain nonetheless. And why not? Now that the “new all-time high” threshold of 1576.09 has been hurdled, who knows where the mental and technical ceiling is?
On the flipside, the “this is getting’ ridiculous” bearish argument has to be take a little more seriously now.
Though it’s not quite there yet, the CBOE Volatility Index (VIX) (VXX) is getting very close to its lower 20-day and 50-day Bollinger bands. While it’s already oddly low, if and when it brushes either of those band lines, we will have officially reached dangerously-high levels of complacency. That’s generally when big pullbacks begin… or at least when the rally starts to slow down (like it did in January).
Low VIX or not though, that 17% rally since November means the market is overbought and ripe for a correction.
S&P 500 & VIX – Daily
It’s a dilemma to be sure. On the one hand the market’s momentum is technically bullish, yet it seems unlikely that stocks could go any further. Even taking the rational side or the disciplined side, however, may be a little pointless right now, as traders and investors mostly seem intent on being led around by the news on a daily basis, using their emotions as the filter. Problem: Emotions can be fleeting, and turn on a dime. They’re also unpredictable (much less predictable that the market’s technical or a rational analysis of how much is too much).
So what do we do in an environment where making a call is little more than a coin toss? We wait.
The good news is, the market’s current situation is one where the bulls or the bears are going to have to play their hand soon. If more bullishness is in the cards, the S&P 500 will establish a base somewhere no lower than 1565 and then rekindle the rally. If bearishness is in store, the S&P 500 will fall back under 1565 and then be unable to move back above it for a few days. Then the market will throw in the towel, and really start to pressure stocks lower.
Just an FYI though… April is notorious for making major tops, and kicking off the “sell in May and go away pullback.
First Quarter Earnings Season
It technically started last week, but first-quarter earnings season isn’t going to reach full speed until this week. The list of the major earnings announcements are on the table below, but we’ll warn you now, it’s a long one.