The bears may have started out in charge of things last week, but the bulls took control on Thursday and Friday, pulling the market back in the black. It would be easy (especially for the perma-optimists) to jump to a bullish conclusion as a result, but before you do that, we all may want to take a step back and look at things with a 'realistic' eye. That's not to say we're bearish. It's just to say things are volatile - to the point of being deceptive - here.
We'll run through the bullish and bearish scenarios in a second. Let's first paint the bigger picture with a bird's eye view of last week's economic numbers.
While there was a truckload of economic numbers doled out last week, not a great deal of it was hard-hitting. In fact, the only biggies all had to do with employment.
The good news is, the United States' economy officially added 175,000 new jobs last month, at least according to the Department of Labor. The figure was much stronger than the forecasted 159,000 new payrolls, and quite a relief following Wednesday's disappointing jobs report from ADP . The payroll processor said it only saw 135,000 new payrolls added in May, falling short of the estimated 157,000. Either way, both the DOL's and ADP's job-growth number for May was higher than April's.
The bad news is, the Department of Labor's unemployment rate crept up from 7.5% to 7.6%. No, it's not a big jump in terms of basis points, but when you're talking about the economy, it's not chump change. How does that happen when the payrolls increase? Because, though the number of employed people grew last month, the size of the labor market grew just a little faster. [Remember, last month's graduations injected a whole new batch of potential workers into the economy.]
Simply put, the employment situation is decent - decent enough to support growth for the economy to those companies and individuals that play their cards right. But, it's not red hot. We can put it like this - job growth isn't strong enough to inspire the Federal Reserve to start 'tapering' its bond-buying efforts anytime soon.
The only other items of interest last week were both encouraging. Factory orders were up 1.0% (though that was for April), and Q1's productivity (2nd calculation) grew by 0.5%. While both numbers are now a little dated, both are positive.
The coming won't be as busy, but it will be more important.
There are going to be two real hot buttons this week. One of them is May's retail sales. Economists expect retail spending to be up 0.30%, with or without automobiles. Both would be much-needed improvements on April's results. As vulnerable as the market is right now, a disappointing number (or worse, a negative number) could really up-end things for stocks.
The second economic hot button this week will be Friday's industrial production and capacity utilization. Both had been modestly on the rise since late last year, but both fell a tad in April. No big deal to see a dip one month, but if we see a second month of contractions for utilization and productivity, we may want to interpret it as a red flag.
Just to set the necessary tone, the market environment (DIA) (QQQ) (IWM) right now isn't one of "predictable trend." It's one of a coin toss, where we could rally just as easily as we could tumble. That's certainly not the kind of conviction-laden situation traders prefer, but we don't deal the cards - we just have to play the hand we're dealt. That said….
The bullish case is simple enough. All it took was a brush of the SPX 1598 level to spark a bounce. That's roughly where the 50-day moving average line was on Wednesday and Thursday when the S&P 500 (SPX) (SPY) began the reversal process, but honestly, we think the floor there had more to do with the fact that the S&P 500 had found that line to be a ceiling a couple of times in April (see dashed line). Either way, it's pretty clear 1598 is a major line in the sand that could become a factor again before it's all said and done.
S&P 500 & VIX - Daily Chart
The bearish case is equally simple - even with the bounce from Thursday and Friday, the S&P 500 still isn't back above the key 20-day moving average line (thin blue line). That's the primary short-term indicator line, and until the index can actually hurdle it, the bulls haven't actually done anything impressive.
And even if the S&P 500 does clear the 20-day moving average line at 1647, there's still a ton of resistance waiting for it around 1680. That's where the upper 20-day and 50-day Bollinger bands are waiting to push any rally back.
All that being said, there are a couple more charts we have to show you today, just for some perspective.
One of them is the weekly chart, where the overall uptrend is still visibly intact. We mentioned a couple of weeks ago that there was a pretty clear rising support line on the weekly chart. That may well have been what sparked last week's bounce. We've added the corresponding resistance line this week. It's currently at 1727, and rising faster than the support line. This is obviously the most exciting chart the bulls are eying right now.
SPX & VIX - Weekly Chart
It's also on the weekly chart we can see the CBOE Volatility Index (VIX) (VXX) bumped into its upper 26-week Bollinger band and immediately turned tail . Although the VIX gapped lower on the daily chart [an invitation for an upward rebound], there's plenty of room for the weekly VIX to keep moving lower… allowing the S&P 500 to keep moving higher.
Last but not least, another daily chart, but this time, one with only one indicator, and the long-term channel lines.
The Bollinger bands are 26-day Bollinger bands. It's not your typical setting for Bollinger bands, but it's one we've chosen to watch because, well, lately it's a setting that's worked exceedingly well at finding the major bottoms. It's also done a pretty god job at keep rallies contained; the S&P 500 has done no better than trace the rising band if the market was rallying well.
S&P 500 - Daily, with 26-day Bollinger Bands
The point is, last week's bounce happened where it should have, for a lot of reasons. If we assume the 26-day Bollinger bands continue to act as they have since November, the S&P 500 could rally at least to 1677 before hitting a ceiling. And, given that some bullish volatility here would push the upper band upward again, the index may not hit the upper band until both are well above 1677.
Not that it's on the immediate radar, but when-and-if the lower 26-day Bollinger band fails to act as a floor, that could start an avalanche.