Have The Bears Finally Taken A Foothold – Weekly Market Outlook

Well, the bulls may have started the month of May in charge, and even retained control for the better part of last month.  There’s little doubt as to who was in charge at the end of the May, though – it was the bears, hitting the S&P 500 (SPX) (SPY) with a 1.43% selloff on Friday.  The close of 1630.74 brings the index to 3.34% below the peak from May 22nd.

Of course, the question everyone has on their mind now is whether or not last week was just a stumble, or the beginning of a bigger (and overdue) corrective move.  We’ll discuss the question in a moment, right after our usual look at the economy’s major data points unveiled last week.

Economic Calendar

It wasn’t an overly-eventful week last week on the economic front, but we did get a few items of interest.

For starters, consumer confidence came in much higher than expected, and much higher than April’s final readings.  The Conference Board’s consumer confidence score ended up ay 76.2, versus the prior month’s 68.1, while the Michigan sentiment index posted a final reading of 84.5 for May, up from prior May estimates, and leaving April’s score of 76.4.

While consumer confidence is supposed to gauge the potential of (and optimism about) the future, in this particular case these big jumps were likely driven by a short-term look-back at the market’s recent strength.  The S&P 500 gained 3.6% in March, 1.8% in April, and had been up as much as 5.6% for May, around the time the Conference Board and the University Michigan were recording their final tallies for their respective confidence indicators.  Those high readings may have been driven by a soaring stock market rather than true confidence about the future.

Interestingly, though consumer confidence was high, consumers didn’t actually feel confident enough to spend more of their money…. which is a big deal, since the whole point of consumer confidence measures are to suggest how much money consumers are apt to spend.  While consumers may be talking a big game, they sure didn’t back it up with dollars.  Personal spending fell 0.2% last month, and incomes didn’t grow a bit. What are consumers so excited about?

You’ll also see that home prices flew through the roof in March; the Case Shiller 20-city index ended the month 10.9% higher than it was a year earlier.  It’s a tad misleading, as the year-ago figure was uncharacteristically weak.  Still, it’s pretty clear home prices – and the pace of home sales – are still improving.

Economic Calendar

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The coming week will be a pretty busy one, though nothing will be all that important until we get to Friday’s unemployment numbers . Economist believe the unemployment rate will hold steady at 7.5%, as job growth for nonfarm private payrolls should roll in at 174,000, down just a bit from April’s 176,000 new private jobs.  Hourly earnings are projected to grow by 0.2%.  Just keep an eye on Wednesday’s ADP employment change number for an early glimpse of what to expect on Friday.  Forecasters say the ADP jobs growth number should jump from 119,000 to 157,000 for May.

Stock Market

After walking on the edge of the cliff for a week and a half, the market finally slipped on Friday, pulling under the 20-day moving average that had been holding it up since May 23rd.  Now that the support’s been broken, the bears are going to have a much easier time taking shots at stocks.

On the flipside, there’s still plenty of potential support below where the S&P 500 closed on Friday… one of the upsides of making an overheated run for the better part of May.  Specifically, the lower 20-day Bollinger band at 1612 as well as the converged 50-day moving average line (purple) and the former ceiling [and perhaps now support] at the 1598 level could both be floors for any more downside.  For that matter, as squirrelly as the market’s been acting of late, we may not even get a chance to test either of those floors before the buying kicks in again. Check it out.

S&P 500 & VIX – Daily Chart

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You can also see on the daily chart that the CBOE Volatility Index (VIX) (VXX) has finally pushed its way above its upper 50-day Bollinger band, signaling that its uptrend is the real deal.  Indeed, that may be far more alarming than anything the market’s indices themselves are suggesting.  Problem: We’ve seen the VIX surge several times before recently, and none of them have followed through; none of them have sent the broad market lower.  This time may well be different for the VIX though.  This time, the pace of the uptrend is smoother and a little more sustainable.

The weekly chart of the S&P 500 puts things in a little more perspective.  The market’s well overbought as a result of the 20% runup since November’s dip, and the VIX is making a slow, arc-shaped (higher lows since mid-March) rally effort now.

S&P 500 & VIX – Weekly Chart

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It’s also on the weekly chart we can see another key floor – the rising support line (dashed) currently at 1590, though it will be at 1598 this week . That 1598 was a key support level on the daily chart as well, but for different reasons.

Still, in both timeframes there’s clearly at least a little more room for the market to keep falling before a firm floor is hit.  Let’s presume the sellers are going to at least test those floors before giving up.

For what it’s worth – and we have to go all the way back to the daily chart to see it – the S&P 500’s upper 20-day Bollinger band has crossed back under the upper 50-day Bollinger band.  And, both band lines are now sloped downward.  That’s a real challenge for stocks, since falling band lines tend to be tough to hurdle.  Even is the S&P 500 does manage to fight its way back above the 20-day moving average line this week, it’s still got a very tough set of hurdles around 1679.  Let’s cross that bridge if and when we come to it though.   Trade Well