Market Bounce or Dead-Cat Bounce?

|
 |  Includes: AZO, BIG, COST, CPB, DIA, IWM, KHC, MDT, NOVL, NTAP, QQQ, SPY, VXX
by: Price Headley, CFA

Weekly Market Outlook:

Technically speaking it was a losing week…. a big loser, in fact - the S&P 500 closed 4.23% lower for the week. However, the bulls ended the week on the right foot with a strong gain on Friday (+1.5%) that may well be the beginning of the bigger-picture rebound.

A trend-follower may be inclined to say ‘dead cat bounce’ (and a temporary one, to be clear). And, he/she may well be right. Before jumping to that conclusion though, let’s take a look at some of the market’s dynamics, since Thursday may have also been ‘the’ blowout day that washed out any remaining bears, and left only the buyers behind.

First though, a recap of what we heard on the economic front, and what’s in store this week.

Economic Calendar

Overall, the economic data last week would have to be classified as a liability… or a signal of underlying problems. Continuing and new unemployment claims were both higher than expected, with initial claims surging well above last week’s figure (to 471K). Though housing starts were up (672K), building permits were down (606K). The Fed’s leafing indicators as well as the Empire Manufacturing survey were also both down (-0.1%, and 19.11, respectively), and under expected levels.

In the aggregate, it’s no wonder investors got scared last week.

Economic Calendar Table

052310-econ-calendar

As for the coming week, existing home sales on Monday’s only biggie. That data will be rounded out on Tuesday with the Case-Shiller Index and the FHFA home price index. New home sales come out on Wednesday. All are expected to show improvements, though such expectations actually pose a lot of risk if any or all of those measures come up short.

There’s not much lese on the radar in the middle of the week, except for Thursday’s usual new and ongoing unemployment claims.

Friday, however, should prove to be a big day. We’ll get personal income and personal spending; the latter needs to come in at or above 0.3% to suggest consumers are still spending enough to sustain this tepid economic rebound. We’ll also get the Chicago PMI number and the University of Michigan Sentiment Index on Friday; the former is anticipated to be lower, while the latter is expected to be a hair higher. (Tuesday’s consumer confidence number is still the more important of the two sentiment measures.)

NASDAQ Composite

We’ll stick with the NASDAQ Composite this week, and work through several of the arguments both sides may be cueing up. While only time will really tell whether or not Friday’s bounce was an omen or a fluke, here are the keys to both results.

What the bulls are saying: Though not perfect, there’s support around the 200-day moving average line (green)…. and this isn’t the first time we’ve seen it. The bounce from the ‘flash cash’ two weeks ago also happened to start right at the 200 day average, and the bulls pulled out all the stops (metaphorically) to make sure the NASDAQ at least closed the week out above the 200 day line.

What the bears are saying: The trend is bearish – one day can’t undo that. Plus, the lower (support) line of the NASDAQ’s long-term trading channel (black) has been broken as of Thursday’s dip to 2203.5. Friday’s bounce back to 2229.04 didn’t pull the composite back above that floor either. Plus, the VXN is still in an uptrend.

What the bulls aren’t saying but could be: They should be pointing out that Friday’s volume behind the rebound was enormous, while Thursday’s selling volume was pretty anemic considering the size of the move.

They should also be pointing out that even though the S&P 500 Volatility Index – or VIX – is still in an uptrend, it made a major outside reversal bar on Friday. Similarly, they should also note that the equity-only CBOE put/call ratio made a multi-month high peak of 0.96 on Thursday. Breadth and depth levels also reached monumentally bearish levels on Thursday, further suggesting a peak in fear that tends to accompany bottoms.

What we say: Let the dust settle. Friday may well be the dead-cat bounce the bears are saying it was; more downside could be n the way this week. Given the conditions of the sentiment indicators though, it would be surprising if there was any bearishness left to price into the market now that we’ve seen a 12% correction from the peak high to the trough low…. which is generally enough to clean the slate.

NASDAQ Composite Daily Chart

052310-nasdaq

Sector Performance

With a week as messy as last week’s, it’s not wise to try and read anything into the leading and lagging sectors. Let’s just let the chips fall where they may this week and then look at the one-week and four-week trends before assuming anything.

Sector Performance Table

052310-sector-rank

Industry Performance

The same goes for the industry ranks that we mentioned about the sector rank…. let’s not make any assumptions based on last week’s wild results.

Industry Performance Table

052310-industry-rankClick to enlarge

Earnings Calendar

This will be the last week we post the earnings calendar for a while, as earnings season is essentially over. However, there are a couple of major points to make about Q1’s overall numbers.

Overall, earnings season was a disappointment in terms of the number of companies that beat or missed estimates. Most of the time, about 2/3 (66%) of companies ‘beat’, while roughly 1/4 (25%) fall short of estimates. This season, only 58% beat, and a full 33% missed. That covers about 3200 major companies.

That said, it should also be noted that the total (in the aggregate) earnings achieved by the market were actually better than expected for the sum of the S&P 500 companies. As of the 19th, with 97% of company earnings reported, the S&P 500 will ‘earn’ about $19.30 on an operating basis, and about $17.45 on a GAAP basis. Both are far better than anticipated just a few weeks ago.

How does this happen? Two reasons. The first reason is, large caps fared much better on the ’beat;’ front than non-S&P 500 stocks did. The other reason is that the companies that did manage to beat estimates did so by a wide margin, while companies that missed – though there were more of them than expected – only fell short by a small margin.

Either way, here’s what’s coming this week.

Earnings Calendar Table

052310-earnings

Disclosure: No positions