Choppy Waters – Weekly Market Outlook

The bulls managed to get a nice reversal rally going on Tuesday of last week. But, when push came to shove on Friday, the bulls couldn’t follow-through and carry the market meaningfully higher. Though the market finished the week above its key short-term moving averages, it also finished the week pointing in a bearish direction.

Maybe it was just a bad day. Maybe the market will rekindle last week’s jump-started rally early on this week and make a run for new highs. (There’s certainly room and some reason for it do so.) But, as has been the case all year long, there are a lot of maybes, ifs, and buts keeping the market stuck in the mud, creating a very choppy and only partially-predictable environment.  

We’ll explore the situation below, after a run-down of last week’s and this week’s economic numbers.

Economic Data

Last week was relatively busy on the economic data front, but none of it was as much-anticipated as Wednesday’s decision from the FOMC regarding interest rates. There was no change – the Fed Funds Rate remains at 0.25%. Moreover, though there was plenty of rhetorical, the language in the Fed’s said little more than the FOMC was likely to effect the first rate hike in years “soon”, as in (most likely) sometime before the end of the year. The bond market, slightly surprised at the lack of conviction, sent yields down slightly the rest of the week once they had time to digest the news.

Consumer confidence took a hit in July, according to not one but two different measures of sentiment. The Conference Board’s consumer confidence score fell from 99.8 to 90.9, while the Michigan Sentiment Index fell from 96.1 to 93.1. Both are a step in the wrong direction, but neither was a trend-breaker.  

Consumer Sentiment Trend Charts
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Source: Thomas Reuters

We also heard the first estimate of Q2’s GDP growth rate last week. Economists think the economy grew 2.3% last quarter. Though the figure might be changed slightly with future revisions, any conceivable number for the second quarter is better than the first quarter’s 0.6% growth.

GDP Chart
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Source: Thomas Reuters

Everything else is on the following grid:

Economic Calendar
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Source: Briefing.com

This week is going to be considerably busier. The highlight, of course, will be Friday’s employment report for July. The overall trend has been progressive, even if not red hot. Though the current unemployment rate of 5.3% isn’t expected to have changed last month, job-creation is expected to have grown – again – slightly. 

Unemployment & Payroll Growth Chart
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Source: Thomas Reuters

Stock Market Index Analysis 

It doesn’t take a very long look at the daily chart of the S&P 500 (SPX) (SPY) to recognize the market is still as choppy as it’s been since February. Stocks acted like they were going to come roaring back from a strong selloff on Tuesday, but once the index fought its way back above its 20-day and 50-day moving average lines, that was it – the tank was already empty. The bulls had thrown in the towel by Friday, with stocks sliding lower by 0.23% that day. It truly is a coin toss from here… at least in the daily timeframe.

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

Underscoring the indecision is the fact that the Percent R indicator is in the midst of its normal range [we generally want to see it at its extremes, which is above 80 or below 20 and shows trend strength] and the MACD lines being pretty well flattened out. 

Though there is some trade-worthiness in chasing the market while it bounces around in this narrow trading range, it’s even less predictable now then it was just a few weeks ago. That is, up until early July, the S&P 500 was at least traveling all the way between its Bollinger bands. Since the beginning of July though, we’ve seen two fairly meaningful short-term reversals – and maybe a third one as of Friday – that were nowhere near the 20-day Bollinger bands.

If one side or the other had an edge over the short-term, we’d have to say it was the bears… but just barely.

The slight edge is evident in two ways. The first way is in the fact that the CBOE Volatility Index (VIX) (VXX) remains unable to push its way under a key floor at 12.0. You can look all the way back through April and see that level has been an absolute. If the VIX can’t break under that support (and it’s asking a lot of the VIX to do so), the market’s going to have a very tough time moving meaningfully higher, or even a little higher. The ceiling at 2130 as well as the upper Bollinger band at 2143 are apt to still prompt pullbacks.

The second way the market looks slightly bearish is the weekly chart of the S&P 500. We’ve observed the momentum waning here for weeks now, and not only is it accelerating again, it’s still decelerating. 

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

The 200-day moving average line (green, on both charts) is also becoming more and more pressured as a floor. It’s the weekly chart’s lower 26-week Bollinger band ay 2052, however, that will likely serve as a make-or-break point.

Until we break above the daily chart’s ceilings or the weekly chart’s floors, it may be wise to not be quick to jump on any apparent trends. It’s not apt to last long. 

That being said, it should also be noted that the market’s average return in August is a loss of -0.18%, and the average September’s performance is a loss of -0.65%. Between the tendency and the market’s deteriorating momentum as of right now, the pressure is very much on the bullish case. The bears may be able to just coast. 

Yields Perk Up, Nearing Key Line

Although the FOMC said a rate hike is still on the table, the market’s now betting it’s not going to happen as soon or as dramatically as traders were counting on just a few days ago. The 30-year yield (TLT) reached a multi-week low of 2.89% on Friday before settling back to 2.92%.

It’s unlikely the 30-year yield is going to move into freefall mode, but if for some reason that yield does break down below its 200-day moving average line currently at 2.82%, that may well be a sign of a fundamental shift – perceived or real – for the economy, which may ignite a chain reaction of lower and lower yields. It’s worth keeping an eye on this week.

30 Year Treasury Index & Yield Chart
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Chart created with TradeStation

Trade Well,