While last week's pullback was sizeable, the big uptrend that's
been in place since early June still hasn't been snapped yet. The
dip did wave a red flag, though, and more weakness from here may
convince more investors that stocks DIA (
), QQQ (
) and IWM (
) are just too risky to own right here, right now, with the current
Details of that theory are offered below, right after we start
with a top-down look at the economy.
Despite pockets of encouragement, by and large, last week's
economic data showed more liabilities than assets. In fact, that
may be the ideal way to break the numbers into groups… the good and
- Despite the jeers and doubts,
the housing market is recovering
. (It may be a choppy and unpredictable rebound, but it's
happening.) Home prices continue to modestly improve; the
Case-Shiller Index was up 1.2% in July, and the FHFA Home Price
Index grew by 0.2% in July. Though the data is two months old, it
semi-jives with August's new-home sales rate of 373K (annually),
and the MBA Mortgage Index rising by 2.8% for the previous
The jobs picture improved too.
Initial claims made a surprising dip from 385K two weeks ago to
359K a week ago. Though ongoing claims remain relatively
unchanged at 3.271 million, there's at least some stabilization
here, and an effort to turn things around. Personal income and
personal spending were up too, 0.1% and 0.5%, respectively.
Consumer confidence made a surprise jump too
, from a score of 61.3 in August to 70.3 in September - that's
almost back to the peak of 71.3 seen in February of this year,
before things (across the board) started to deteriorate. The
Michigan Sentiment Index also saw a big jump in September, moving
from a reading of 74.3 in August to 78.3 now. Again, it shows a
great deal of optimism that doesn't seem like it should exist,
given the weak economic backdrop; is this a "do as I say and not
as I do" situation?
- There's no doubting
last week's most troubling economic data nugget; The
United States' second-quarter GDP only grew by 1.3%
, following prior estimates of 1.7%.
- Almost as bad as a weak GDP for Q2,
durable orders fell 13.2% for August
. Granted, that was including auto orders, which are
hyper-volatile. But, even without automobiles, durable orders
slumped 1.6% . (And, considering the importance of automobiles to
so many other industries in the country, it's not like there's no
ripple effect from a weak car sector.)
Pending home sales were off by 2.6% in August
, contrasting with the bigger idea of a recovery for the housing
sector. It's just one month, and not a huge dip. But, it's little
stumbles like that which prevent the housing market's rebound
from fully taking hold.
For the coming week, we're going to be keeping a close eye on
Wednesday's ADP Employment Change numbers, which should be at least
somewhat telling of what to expect on Friday when we get the
official payroll-growth numbers from the government. The pros
expect to see a net of 133K and 130K newly-created jobs,
It's still not apt to move the unemployment rate's needle
from 8.1%, however.
We're going to start our technical analysis this week with the
weekly chart, as it better tells the key part of the story while
also offering some needed perspective.
Why is that so important now? Take a look - you'll see it
SPX & VIX Weekly Chart
(click to enlarge)
Last week's 1.33% dip for the S&P 500 (
) was not only out of character for the market, it was the worst
(biggest) weekly loss we'd seen over the course of the week since
the one from late May that kick-started the rebound in early June.
This one is radically different from that one, however.
The 3.1% plunge in the last week of May was the tail-end of
a bigger, nastier selloff, and was capitulatory. Last week's slide
was the first real setback after seventeen weeks of
largely-unfettered bullish effort. Translation: There's still
plenty of room for stocks to keep falling now, unlike May, when
there was no ground left to give up.
There's another detail adding to the bearish pressure now too -
the recent brush of the upper 26-week Bollinger band, which has
applied bearish pressure in the recent past.
Mostly, though, it's the size of last week's selloff that could
be implying the rally has finally ended. A 1.3% dip isn't massive,
but it sends a fairly strong message.
All that being said, it's not like the bulls don't have any
supporting arguments of their own. One of them is the fact that the
VIX isn't exactly trending higher yet.
Until the CBOE Volatility Index (VIX) (VXX) actually starts
to make meaningfully-higher highs (a move above its 26-week or
52-week moving average lines would be a good start), it's possible
to simply chalk up last week's dip to lethargy, or listless
drifting while traders think about things from the sidelines. After
all, volume remains stunningly low.
So how does a closer look at the daily chart enhance the
analysis? It doesn't change the bigger-picture theme, but we can
see what stopped the market's bleeding - at least temporarily.
As of Friday's close, the S&P 500 ended the session right on
the key 20-day moving average line after closing under it on
Wednesday, and back above it on Thursday. Traders are simply on the
fence here, waiting for a sign of what's on the horizon.
SPX & VIX Daily Chart
(click to enlarge)
One thing we are seeing a stronger hint of with the daily chart
is upward pressure on the CBOE Volatility Index. Though the VIX's
uptrend isn't "well developed" yet, we can see it's stopped making
lower lows [check out the dashed support line at 13.4], and is
getting more and more comfortable above those key moving average
lines. Notice how close the VIX's moving averages are getting to
one another. That tide is getting close to turning all the way.
In the short run, the S&P 500 looks destined to retest the
1410 area, where the 50-day moving average and the 20-day Bollinger
band are about to converge [see the daily chart]. Beyond that, the
1376/1380 area could be retested as a floor, where the 100-day and
200-day moving average lines are about to converge on the weekly
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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