Walking The High Wire: Weekly Market Outlook 9.8.14

The bulls appear to be in charge, judging from Friday’s bullish kick… bullishness that formed despite a lethargic week and despite the fact that stocks are still overbought from August’s big runup.  Yet, being bearish or bullish at this point isn’t just a matter of taking the market’s current temperature.

The upside and downside for stocks is hashed out below, after a quick look at last week’s and this week’s major economic news.

Economic Data

Although there was a pretty steady stream of economic news last week, none of it was as interesting and important as Friday’s employment report.  And, while the market responded favorably to that news, it wasn’t necessarily for a “good reason”.  The jobs update was on the weak side of the spectrum, and assuming the Federal Reserve is going to nip any problems in the bud, investors gambled on a more dovish environment for the foreseeable future.  Right or wrong, it’s what happened.

In any case, the basic gist of employment news was, a few more people are working, fewer are unemployed, and it was enough progress for the Department of Labor to say 142,000 (net) jobs were created last month.  Those numbers slightly overstate the official stated increase in the number of employed individuals and the stated number of unemployed individuals… enough to whittle the unemployment rate down from 6.2% to 6.1%.  The problem is, the pros were expecting the addition of 223,000 new payrolls.

While the news showed progress, it’s inadequate progress.  That’s why investors presumed the Fed was going to stop any bleeding before it started in earnest.  And, that’s why investors were willing to renew their buying effort to close out the week on Friday, regardless of the fact that stocks are overbought here.  As for the actual employment trends, they are on the chart below:PH 9 14-employment

All the rest of last week’s big data is on the following grid:

Economic Calendar

PH 9 14-econ-dataSource:  Briefing.com

This week is going to be a busy one as well, in terms of economic numbers, though like last week, not a great deal of it is going to be earth-shattering.  The most important information in the lineup is Friday’s retail sales figures for August.  We’ve seen respectable retail sales growth to date, and we’re apt to see another good month for consumerism when Friday’s results are posted.  Here are the retail sales trends, with and without automobiles.

Stock Market Index Analysis

You have to give credit where it’s due.  The bulls overcame the odds last week to lead the S&P 500 (SPX) (SPY) to a close at a record high close after hitting a record intraday high.  It may have been for a questionable reason (hopes for more stimulus from the Fed), but the end result is still the same – stocks got over a major hump.

The daily chart of the S&P 500 below illustrates the details . Last week’s close of 2007.71 was above a fairly critical ceiling of 2005.  The volume behind Friday’s big advance was pretty strong too, which had been a concern regarding the advance seen over the course of August.  Throw in the fact that the CBOE Volatility Index (VIX) (VXX) once again seems unwilling or unable to fight its way above a minor ceiling at 13.0, peeling back when bumped into last week.  Taken just at face value – without recognizing the index gained a whopping 4.6% over the prior four weeks – it’s bullish.  Take a look:

S&P 500 & VIX – Daily Chart

PH 9714-nasdaq-dailyAll charts created with TradeStation

It’s not just a simple matter of technical bullishness, however.  The S&P 500 is up 4.6% for the past month, is up 9.4% year-to-date, and up 47% for the past 22 months.  Oh, and as of right now, this is the longest uninterrupted advance the market has ever seen.  More specifically, the market has now gone 64 months without a correction of 10% more.  Were earnings growing at a break-neck pace, it might be palatable…. even sustainable.  Earnings aren’t going ballistic though.  The S&P 500 is trading at a trailing P/E of 17.4 at this point.  It’s not a “scary” valuation, but it’s a frothy one.  The forward-looking one of 15.4 isn’t exactly a bargain price either, relative to the norm.

That trailing P/E only makes the long-term (weekly) chart of the S&P 500 even more alarming.

On the flipside – and speaking of the long-term trend – the market has had a funny way of defying the odds for months at a time.  Case in point: Valuations were irrelevant in the late 90’s when they reached crazy levels.  They didn’t matter until they mattered.  When they mattered, though, they mattered in spades.

In that context, the weekly chart of the S&P 500 looks amazing, yet doesn’t necessarily look like a meltdown is a foregone conclusion.  There are some key lines in the same we need to keep tabs on in this timeframe, however.

The biggest of those lines is the long-term support line (dashed) that extends all the way back to the lows from late-2012.  The 100-day moving average line is also there right now, and has also been a major floor/recovery point for the index over the course of the past 22 months.  Until the S&P 500 breaks below that floor, any dip can be dismissed as typical volatility.

S&P 500 & VIX – Weekly Chart

PH 9714-sp500-dailyStill, in the weekly timeframe we can see the VIX is hovering at multi-year lows.  It can hover there for weeks if not months at a time.  It’s playing with fire the whole time it’s that low, however – nothing lasts forever.

The same basic idea applies to the NASDAQ Composite (COMP) (QQQ); it seems to be running well, but there’s a headwind right above.  On this weekly chart, the index is bumping into the upper 26-week Bollinger band as well as the upper 52-week Bollinger band. And if you look closely, what used to be a major support line (dashed) has become a resistance level.

NASDAQ Composite & VXN – Weekly Chart

PH 9714-nasdaq-weekly

Like the S&P 500 index, however, there’s room for a small pullback from the composite before it officially changes direction.  In this case, the 100-day moving average line (gray) at 4326 should be the make-or-break level for the NASDAQ.  More near-term, a floor is developing at 4488.

Interestingly, though not likely coincidentally, the 4326 level was also “the” low for several days in early August.  You can see how big of a deal that level is on this daily chart.

NASDAQ Composite & VXN – Daily Chart

PH 9714-nasdaq-dailyBottom line?  While the picture may be technically bullish, stocks are ripe for at least a small profit-taking wave.  Part of that’s because the market is overbought, while part of it is the calendar – September is (on average) the worst month for stocks… the NASDAQ in particular.  It remains to be seen, however, how bad it’s going to be.  As was detailed above, there are a lot of ways/places for the bulls to stave off any major correction.  Odds are good we’ll get a minor one though, even if it doesn’t start immediately this week.  There’s enough room for the indices to gain another full percentage point or so before bumping into its key upper Bollinger bands on the daily charts.  If the pullback doesn’t materialize before then, odds are good it may materialize then.   Trade Well,  PH  BigTrends.com