Inflection Points Are Near

by: Price Headley, CFA

Stocks staved off a bear attack last week, advancing 3.5% following the prior week's 1.2% loss. Over the prior three weeks, we've seen the market rebound 7.8%, leaving one to wonder if all the gloom and doom prognostications were making things out to be far worse than they actually were.

To be fair, the underlying economic data could be interpreted either way. Given the behavior of the indices though, it looks like traders have decided to start viewing the glass as half full.... which may largely be the result of strong (and surprising) earnings results.

We'll look at all of it below.

Economic Outlook

It was a light week in terms of economic data, but an important one on the real estate front - though not a great one. We did see a bump and a 'beat' in the number of building permits requested. There were 574K permits issued in May, and analysts were looking for 572K this time. We actually saw 586K permits issued in June, indicating that future construction activity will be stronger than the recent past.

Other than that though, real estate seems to be suffering. The National Homebuilder's Index (a confidence index, mostly) fell to multi-month lows, housing starts were down by even more than expected, and existing home sales fell by about 5%.

New unemployment claims bounced back up to 464K, right where they've been hovering for weeks, and undoing an encouraging drop in the prior week. Ongoing claims did make a significant move lower to 4.48 million.

Economic Calendar

There's a lot more in store for the coming week. New homes sales will be unveiled on Monday, with the Case-Shiller Index being updated on Tuesday; both are forecasted to show modest improvements. The same goes for Wednesday's durable orders (even if the bulk of the improvement is aircraft sales).

On the confidence front, look for the Conference Board's Consumer confidence figure - which plunged like a rock last month - to be released on Tuesday, while the University of Michigan Sentiment index will be updated on Friday. The former is expected to move down, while the latter is anticipated to go up.

S&P 500 and VIX Outlook

It's a clear good news/bad news scenario for the major indices. Let's just approach it from that perspective, beginning with the S&P 500 (SPX) (NYSEARCA:SPY).

The good news is....

  • The S&P 500 Index has crossed back above the 50-day moving average line (purple), which had been a resistance line with the bullishness from three weeks ago.

  • The CBOE Volatility Index (VIX) (NYSEARCA:VXX) (NYSEARCA:VXZ) is trending lower. Moreover, the VIX's lower Bollinger band (at 20.13) is now pointed lower, meaning it's less likely to act as a deflective floor. Rather, it just may gently catch the VIX and slowly guide it lower.

The bad news is...

  • The S&P 500 is on a crash course for the 200-day moving average line (black) at 1113.4, and the upper 50-day Bollinger band at 1141. Either could halt or slow the advance, and if they combine at the same area, they could be become doubly-tough to cross.

  • The VIX, though trending lower, seems to be hitting a minor floor around 23.0 (dashed)

While from a fundamental point of view the recent gains and more upside are merited, from a technical point of view we see some roadblocks in the near future. We're getting close to the inflection point.

S&P 500 Daily Chart

NASDAQ Outlook

Since the NASDAQ's pros and cons are similar to the S&P 500's, we're not going to dive into the same detail. We'll just point out that the NASDAQ is - unlike the S&P 500 - above its 200-day moving average (black). It's still going to tangle with its upper Bollinger band though, currently around 2363, but falling fast.

The VXN is also pointed lower... barely. Its floor (dashed) seems to be just a hair above 23.00 as well, though we've not necessarily seen any real effort to push up and off that line.

As was the case with the SPX and the VIX, the NASDAQ Composite (COMP) and the VXN suggest there's a little more room for upside, but real tests are on the horizon.

NASDAQ Composite Daily Chart

Sectors - Industrials and Materials Lead the Way Again

For the second week in a row we saw materials and industrial stocks lead the way, with transportation stocks (thanks to stellar results from a few railroad and trucking names) not far behind. At the bottom of the pile was healthcare - again - with gold just one notch above the bottom rung.

While a rally out of the summer doldrums still isn't a foregone conclusion, the sector-leadership trends we're seeing develop now are apt to be early omens of what's in store if the bulls can just keep getting traction.

Sector Rank

For those of you who are a little more visual, the percentage-change comparison chart may better depict how these sector trends are shaping up since the peak on April 23rd.

Sector Comparison

Growth Stocks Leading the Way?

There's little confusion about where the strength was last week - small caps dominated, mid caps were in the middle, and large caps lagged.... though a 3.5% 'lag' is nothing to be ashamed of. While market cap seemed to be more of a matter than style last week, growth is still proving to be more fruitful than value in the recent bigger picture.

Style Rank

And as we did with the sectors, here's the visual comparison of returns for the major market cap/style groups, since the April 23rd top. It's here we can see how well growth stocks are coming out of the April/May funk.

Style Comparison

Earnings Season

As far as earnings seasons go, this one is fairly typical with 68% of reporting companies having 'beat', and 24% having 'missed'. A total of 653 of the 3000 or so we're watching have posted results. Here are the big ones lined up for this week.

Earnings Calendar

Disclosure: No positions.