Despite a convincing reversal of a budding downtrend the week before, last week's bullish effort fizzled. Although it's pretty clear the indices have been unable to fight their way back above a key ceiling, it's equally clear the bulls have drawn a line in the sand at a key support level.
We'll look at how the market's trapped between support and resistance (and which is apt to break first) in a moment. First, let's recap last week's major economic announcements.
Although it wasn't until Friday the market finally started to care about any of last week's economic numbers, we started to get some heavy data on Thursday. That's when we got the retail sales report for May. As it turns out, spending was up fairly well last month, growing by 0.3% without automobiles, and up 0.6% counting the impact of rising car sales . It was much better than April's stagnation, suggesting consumers aren't completely dead in the water here.
Friday, however, is when the pedal hit the metal, kicking off with May's producer price inflation rate. As it turns out, input prices (for factories, fabricators, etc.) are only up 0.6% for the past twelve months. Truth be told, it's alarmingly weak.
It was also on Friday we heard that May's capacity utilization fell, and that industrial production was flat. One month does not make a trend, and it's not like the numbers fell precipitously. Then again, the growth trend that was driving both sets of numbers through the latter part of last year has tapered off to little more than a flat line. We're vulnerable here, which is a problem, given the strong (and largely unrecognized) relationship between those numbers and the long-term market.
Finally - and this was pretty much what crimped the market on Friday - the first reading for June's Michigan Sentiment Index score of 82.7 was lower than May's final reading of 84.5. What the market seems to have forgotten is that May's reading was abnormally strong, and that Friday's reading was just the first of three reading for the month - it could end up being quite different later in June. Traders needed an excuse to take some profits, however, and that was the one they glommed onto.
The coming week will be a little lighter, in terms of the amount of economic data we're getting, and the importance of the data in the lineup.
On Tuesday we'll round out the inflation picture with last month's consumer price indeed (CPI) figure. The most recent annualized inflation rate is 1.06% (for April), which like last week's PPI inflation rate is on the alarmingly-low side.
We'll also get last month's housing starts and building permits numbers on Tuesday . Both have been rising for a year and a half, but we're getting to the point now where it's going to be very tough to keep that growth pace up. The pros say starts will be up, and permits will be down, by more than a little in both cases. Good or bad news here could make or break the market.
The real estate report card will be finished up on Thursday with May's existing home sales. Economists expect the pace to reach 5.0 million units per year, up a tad from April's 4.97 million. That's pretty strong, though the growth pace is a little tepid. Still, growth is growth.
Just to frame our analysis with the right perspective, traders aren't sure what to do here, so they're basically doing nothing. The market's (DIA) (QQQ) (IWM) waiting for one side of the table or the other to show their hand, but neither side is budging. Eventually the indices will rock their way out of this rut, and by so doing kickstart a trade-worthy move. Until that happens, however, things are on hold.
With all of that being said, here's the deal - the S&P 500 is hitting resistance at its 20-day moving average line at 1642.16, but is finding support at its 50-day moving average line and lower 20-day Bollinger band around 1610. The good news is, the floor and ceiling are converging, so the market's going to be forced to break out of this rut pretty soon.
S&P 500 & VIX - Daily Chart
So which way is it going to break? That's still up in the air, but we can say this - the bears are applying a lot of pressure here, and the bulls aren't able to put up much of a fight.
The chart below is another daily chart of the S&P 500 (SPX) (SPY)… only zoomed out to show more days. When you take this big step back, you can see how the CBOE Volatility Index (VIX) (VXX) is finally starting to TREND higher. We've seen the occasional upward thrusts from the VIX since late last year, but it's only been within the past few weeks that the VIX has started to walk higher in a sustainable way.
The proof lies in the fact that the 20-day and 50-day moving averages (blue and purple, respectively) are now moving above - and away from - the VIX's 100-day moving average line. In fact, the 100-day moving average line is now sloped upward, for the first time in months. And, the VIX is repeatedly (NOW) pushing up and against its upper 20-day and 50-day Bollinger bands. Put it all together, and it says the undertow is trying to shift even if it looks like the market's holding on.
S&P 500 & VIX - Zoomed Daily Chart
So what changes when you zoom out even further by looking at a weekly chart? Not much. But, it's with the weekly chart we can see just how important that long-term bullish channel we talked about last week (dashed) has become. For the second week in a row the floor of that channel was tested, and for the second week in a row the bulls at least managed to defend that line. It's at 1608 for this week, pretty much in line with the key floor on the daily chart. So, while that support line is plenty strong - since it's the convergence of several technical support levels - if it should break, that could start a real avalanche. The bigger bull trend is still intact, but we're a hair away from things getting real ugly, real fast.
S&P 500 & VIX - Weekly Chart
Let's see if the bulls can defend their ground for the third week in a row. Our only caution is that the longer the S&P 500 just lingers around the floor, the more in-jeopardy it gets. The bulls need to make a decisive push up and off that long-term support line for us to say the bigger trend is worth stepping into again.