BigTrends.com Weekly Market Outlook – Neutral With Downside Risk

The bulls and bears ended up in a stalemate last week. Both sides of the table looked as if they were going to take control at different points, but when all was said and done, neither side had the conviction need to rock the market out of its rut. The S&P 500’s (SPX) (SPY) close of 2052.32 was only 0.27% better than the week-earlier close, and still right in the middle of some major support and resistance. The BigTrends TrendScore (for stocks) is a slightly anemic 56.6 out of a possible 100.0 – a neutral rating currently. That’s 7.2 points better than the score from a week earlier, but still below the 60 threshold we need to surpass to say stocks are in a confirmed uptrend. In fact, broad market charts are closer to slipping into confirmed downtrends than uptrends.

We’ll dissect the upsides and downsides below, as always, after a quick review of last week’s and this week’s economic news.

Economic Data

Though none of it helped the market move much – higher or lower – we got a pretty big dose of economic news last week. In order of appearance (and limited to just the most important items)…

Inflation is perking up a little faster than economists were expecting it to. For April, overall consumer inflation grew 0.4%, and core (ex food and energy), inflation grew 0.2%. On an annualized basis, the overall inflation rate now stands at 1.13%. Granted, gasoline prices are still at the low end of their usual scale, but without gas and food, inflation now stands at an annual pace of 2.1%…. above the Fed’s target. Consumers are feeling the pain, and the Fed is apt to be more interested in nipping it in the bud earlier rather than trying to reel it in later.

Consumer Price Inflation Chart

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Source: Thomson Reuters

It was also a big week for real estate news, and it was decidedly good. Housing starts and building permits both grew, and both outpaced expectations, for last month, and on Friday we learned existing home sales also rolled in higher and much better than expectations.

Housing Starts and Building Permits Chart

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Source: Thomson Reuters

We got some much-needed improvement in capacity utilization and industrial productivity. One good month doesn’t undo several bad months in a row, but it does prevent this data from moving into panic levels.

Capacity Utilization and Industrial Productivity Chart

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Source: Thomson Reuters

Capacity utilization and industrial productivity are still among the top long-term indicators that coincide with the market’s long-term trends.

On Wednesday we also gained access to the minutes from the most recent FOMC meeting. The tone of the meeting was mostly hawkish, with a June rate hike distinctly on the table.  Still, the market says the odds of increased interest rates next month are only 34%.

Everything else is on the following grid:

Economic Calendar

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Source: Briefing.com

This week should be a little quieter in terms of economic news, but it will be another important one for real estate. On Tuesday we’ll hear about last month’s new home sales pace, and on Wednesday we’ll get an updated FHFS Housing Price Index. The former is expected to rise, jibing with last week’s improved real estate and construction numbers.

New Home Sale, Existing Home Sales, Inventory Chart

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Source: Thomson Reuters

FHFA Housing Price, Case-Shiller Index Chart

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Source: Thomson Reuters

We’re also going to be interested in this Friday’s second reading on Q1’s GDP growth. Estimates have been revised upward since the first reading, which could offer a lift to the struggling stock market after investors soured on stock’s following the preliminary first quarter GDP change.

GDP Annualized Growth Chart

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Source: Thomson Reuters

Stock Market Index Analysis

Since we’ve been monitoring the charts for a while – and discussing them as needed – we’ll first look at an updated version of our NYSE up-volume/down-volume trend chart, and compare that to the Chaikin line (which more or less shows the same volume trend).

The up-volume trend (blue) and the down-volume trend (red) are found in the middle portion of the chart of the S&P 500 below. Though the down-volume trend for the NYSE’s stocks has tapered off, it still overtook the up-volume trend a couple of weeks ago, and is still dominant over the up-volume trend. As for the Chaikin line, it finally crossed below the zero level, slipping into confirmed bearish territory. Between the two, it’s difficult to say the undertow hasn’t turned bearish.

S&P 500, with Up/Down Volume and Chaikin Line Chart

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Chart created with TradeStation

This is at odds with the neutral-but-improving BigTrends TrendScore, but when we drill deeper into a technical analysis chart of the S&P 500, we can see why. Though the market’s been toying with some other confirmed key bearish signals from our preferred technical analysis tools, we really don’t have any other confirmed bearish clues. Namely (and as you’ll see n the daily chart of the S&P 500 below), the Percent R line has yet to get AND STAY below the its 20 threshold, and the CBOE Volatility Index (VIX) (VXX) has yet to push its way above 16.7 and into a full-blown uptrend. While both MACD lines are now below zero, a closer look at that indicator says that weakness is a “just barely” situation that could change at a moment’s notice.

S&P 500 & VIX Daily Chart

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Chart created with TradeStation

That being said, when we look directly at the shape and action of the S&P 500 index for the past few days, we still have plenty of reason to be preparing for the worst.

One of the biggest red flags is Friday’s bar. Following through on Thursday’s hammer-shaped reversal (bullish) bar that materialized after a brush with the lower 20-day Bollinger band, for a while on Friday it looked as if the bulls were ready to stampede. All it took was threat of brushing the 50-day moving average line (purple) on Friday, though, to make the buyers rethink the rally; we gave up nearly half of Friday’s intraday gain by the time the closing bell rang.

Zooming out to a weekly chart of the S&P 500 gives us a great deal more perspective on how/why this is all happening. It’s quite clear now that the index simply wasn’t meant to hurdle a resistance line (dashed) created by the last three major peaks.

S&P 500 & VIX Weekly Chart

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Chart created with TradeStation

On this chart we can see how much downside potential the market has right now. The VIX has just as much upside potential. The question is, will the VIX and the S&P 500 use that potential. We’ll see this week if the bears intend to use it. It’ll start with the the VIX getting above and staying above 16.70.