No Progress Since February – Weekly Market Outlook

The market certainly got off on the right foot last week, rallying all the way through Thursday when the NASDAQ Composite (COMP) finally cleared its all-time record high set back in March of 2000. With no other major market index completing the same feat though — in addition to Friday’s pullback somewhat extinguishing the budding rally — we can say right now that once again stocks are caught between a rock and a hard place.

We’ll dissect the details below, right after a quick run-down of last week’s and this week’s important economic news.  

Economic Data

It was a fairly full week last week in terms of economic news, but only two really big ones.

The fireworks started on Tuesday with May’s housing starts and building permits data. It was a mixed message. Starts fell from a pace of 1.165 million to 1.036 million, but permits ramped up from a pace of 1.140 million in April to 1.275 million last month. Either way, both are in long-term uptrends. 

Housing Starts and Building Permits Chart
Source: Thomson Reuters

We also got an updated look at our inflation situation. Overall prices were up 0.4% last month compared to April’s prices, though on a core basis (not counting food or energy) consumer prices were up a mere 0.1%. On an annualized basis, the inflation rate now stands at 0.0%. On a core basis though, our annual inflation rate is a still-tepid 1.7%.

Inflation Chart
Source: Thomson Reuters

And of course, the Federal Reserve told us on Wednesday that though there would be no change to the current Fed funds rate of 0.25%, we could expect one at some point in the foreseeable future. September and December are the regularly scheduled times to make such a change if one (or two) becomes necessary. And, Janet Yellen believes economic growth and the unemployment situation are still both on a track that will prompt a rate hike sooner than later. All the same, Wednesday’s comments from the recent Fed meeting were ambiguous enough to leave all options open. 

Everything else is on the following grid:

Economic Calendar

This week will be a fairly busy one as well.

The party get started on Monday with last month’s home sales, though that picture won’t get rounded out until Tuesday’s new home sales report for May. Economists are looking for modest upticks on both fronts, extending bigger-picture uptrends for each.  

New and Existing Home Sales Chart
Source: Thomson Reuters

We’ll also get the third and final reading on Q1’s GDP growth rate. Economists are expecting the -0.7% dip reported last time to be scaled down to only a -0.2% lull with the upcoming announcement. It’s still a troubling figure, however. 

Stock Market Index Analysis 

As pointed out recently, this has been a grinding market with some similarities to 2011. The S&P 500 (SPX) (SPY) has worked very hard all year long, but only has a 2.5% gain to show for it. And it’s made no progress since February 26th. The NASDAQ Composite has fared only slightly better despite the poke into record-high territory on Thursday. 

Our concern and prediction is that we could remain in this chop indefinitely, bouncing around between a fairly well-defined trading range. Last week may have been technically bullish, but in the grand scheme of things it may have only been just another upswing to the upper side of a trading range. We’ve seen this happen several times (to no avail) since February. Take a look at the S&P 500’s daily chart. It’s just gyrations between a ceiling at 2118 and a floor at 2072, with an occasional visit of the 2046 area. 

S&P 500 & VIX Daily Chart
Chart created with TradeStation

You’ll also see the CBOE Volatility Index (VIX) (VXX) pulled back to a major floor at 12.7 late last week, suggesting investors may have gotten a bit complacent.

Yes, we got a bullish MACD crossover on Thursday. Just bear in mind that’s the fourth bullish MACD cross we’ve seen since March. The first three didn’t go anywhere.

Zooming out to a weekly chart of the S&P 500 gives us a little more perspective. It’s in this timeframe we can see the index may be making a rounded top. But, the floor being provided by the 26-week moving average line at 2083 is holding up quite firmly. The weekly VIX also suggests it’s trying to move upward – up and off a key support level around 12.7 – but can’t so far. 

S&P 500 & VIX Weekly Chart
Chart created with TradeStation

The best counter-argument to the S&P 500’s bearish cues is the weekly chart of the NASDAQ Composite. It simply continues to travel higher, guided by a combination of its 26-week (blue) and 100-day (gray) moving average lines on the lower side of this channel, and by a straight-line ceiling (dashed) extending all the way back to July of last year. While it’s been an unbelievably well-sustained move, from a chartist’s perspective, it’s not really surprising.

NASDAQ Composite & VXN Weekly Chart
Chart created with TradeStation

Conclusion? The trend is still technically bullish, though there’s no denying it’s been tough to be a bull lately. It didn’t get any easier last week. If anything, it got tougher.

As for trading advice, at this point we should probably count on reversals at key support and resistance levels. At the same time, we should be scalping small trades if and when those ceiling and floors are broken. For example, it appears the S&P 500 has indeed bumping into a known ceiling at 2118. If we get some downside follow-through – say back under the 20-day and 50-day moving average lines currently at 2105 – we can likely count on a trip back to the floor at 2072. On the flipside, if the S&P 500 manages to break back above 2118, the trade would then be riding the move back up to the upper Bollinger band, currently at 2131. 

For the NASDAQ, the weekly chart’s upper Bollinger band and its 100-day moving average line currently at 4981.7 seem to be the primary trading range boundaries right now. 

Given that the pattern has been established and it’s all the market is giving us for the time being, you have to take whatever you can get until the indices break out of this gyration mode/funk.

Industrial Stocks Remain on Top, With a Twist

Last week we mentioned it appeared industrial stocks, as represented by the S&P 500 Industrial Index, looked better positioned for bullishness than any other sector at this time. Though the large cap industrial group is still attractive, we’d like to refine the call and suggest that, based on the shape of its chart, the S&P 600 Industrial Index stocks are even more likely to stage a summertime breakout.

The chart below isn’t difficult explain. After making something of a head-and-shoulders pattern over the better part of 2014 and early 2015, the neckline was cleared in February. Since then, the neckline has been tested and verified as a floor. The clincher for this renewed strength came last week when the S&P 600 Industrial Index made a market-leading gain, and even moved higher on Friday when not much else did.

S&P 600 Industrial Sector Chart
Chart created with TradeStation

What’s really compelling about the small cap industrial chart is how, unlike many other stocks, these names don’t appear to be so overextended.

Trade Well.