Market Outlook: Odds Favor the Bulls

The unemployment rate’s move to multi-year highs didn’t seem to be too much of a worry for the market, as the S&P 500 closed up 3.2% - at 1069.30 - for the week. And, the odds now slightly favor the bulls as we head into next week… with a footnote.

The S&P 500’s got a couple of things working in its near-term favor.

The first one is the CBOE Volatility Index (VIX). It’s falling, but it’s still got plenty of room to move lower before a likely floor at the lower Bollinger band (20 day, 2 SDs) steps in around 18.40. You’ll also see the VIX peaked and reversed at what’s become a pretty significant resistance line of its own. We’ll probably be looking at that resistance level again in the future.

The second bullish case for the market stems from the fact the S&P 500 (and the other indices too) have made their way back above the 50 day moving average (purple in the following chart). If this instance is anything like the July instance, then the proverbial ‘reset’ effect of the small dip could be enough fuel to carry us through the end-of-year rally. We don’t think a repeat is likely, but the market seems intent on testing the premise.

SPX Daily Chart

For now then, the outlook is only a mildly bullish one, rooted more in the idea that the bears simply aren’t putting up a fight…. a thought to keep in the back of your head for a second.

As for the other indices, the Dow ended the week higher by 293 points (+3.0%) at 10,006, while the NASDAQ gained 67.33 points (+3.3%) to end the week at 2112.44. Both charts mirror the S&P 500’s, but the addition of a stochastic indicator to the NASDAQ’s chart verifies where the strength is coming from… we’re oversold.

Nasdaq Composite Daily Chart

The Dow’s chart drives two other key points home. The first one is the role that the 10,000 level (horizontal line, in red on the following chart) is playing. It’s probably 100% psychological, but it’s still a factor to contend with.

The second point is a recent development…. a rising support line (also in red) that traces the four major lows we’ve seen since August has formed a wedge shape. This triangle pattern may end up providing the squeeze the bulls need to remain alive; at the very least it will act as a signal for an impending pullback.

DJIA Daily Chart

In the case of all three indices though, there was one blaring problem that suggested this week’s rebound was not the majority opinion – volume… or lack of it, to be specific. The selling volume was growing when the market was on the way down two weeks ago, but was shrinking when stocks were pointed higher this week. That’s not a situation that screams ‘trend longevity’, so at this point there’s no reason to think the indices will be able to muster much more upside - if any – than that of a typical ‘oversold’ bounce.

Indeed, both the SPX as well as the NASDAQ Composite only tested their 20 day moving averages, but neither has hurdled it yet.

As for the ‘bigger picture’ economic data – the data that can push stocks around anyway – unemployment was the 800 pound gorilla in the room. No doubt that 10.2% is rough, particularly if you’re one of the statistics. In the grand scheme of things though, another 40 basis points added onto to last month’s total isn’t anything we’ve not grown accustomed to.

To really put it all into perspective though, here’s a chart of the unemployment rate going back a few decades:

Unemployment Monthly Chart

There is one thing to bear in mind if you’re really interested in the long-term ‘investor’ trend instead of short-term swings though… the unemployment rate generally continues to rise for a few months following the end of a recession; jobs are the last thing to rematerialize.

In any case, here’s a run-down of economic data we heard this past week, and what’s on tap for the coming week.

Economic Data Calendar

And, while earnings season is slowing down, there are a few more biggies we all need to be aware of, since they could stir the market’s pot. Notice how many retailers are slated for next week.

• 11/9/09 – Electronic Arts (ERTS)
• 11/11/09 – Macy’s (M)
• 11/12/09 – Blockbuster Inc. (BBI)
• 11/12/09 – Nordstrom Inc. (JWN)
• 11/12/09 – Walt Disney (DIS)
• 11/12/09 – Wal-Mart Stores Inc. (WMT)
• 11/13/09 – Abercrombie & Fitch Co. (ANF)
• 11/13/09 – JC Penney (JCP)

Bottom Line:

MARKET TIMING:
STOCKS: Bullish
GOLD: Bullish
OIL: Neutral
BONDS: Bearish

Disclosure: None

Comments

[j_remington:]

ahem... Monday's upside move was on low volume

Nov 10 09:48 AM

[chris coonan:]

The Bulls are in the China Shop though....watch for broken dishes in 2010....

Nov 10 12:17 PM