Market Outlook - Red Flags Amid A Trading Range

| About: SPDR S&P (SPY)

Summary

Producer price and consumer inflation rates rose to levels not seen since 2012 and 2013, respectively. Also, we saw signs of a rebound on the real estate and construction front.

Both Industrial Productivity and Capacity Utilization fell, for the first time in a while. If May doles out another slide from these numbers, that could be a sign of trouble.

The market's floors and ceilings are very well defined, and have been proven multiple times. But there are red flags that suggest growing odds of a more significant pullback.

It looked like the market was finally going to break out of its funk early last week. But, by Thursday it was clear the rally effort wasn't a breakout, but just another fakeout. The bulls are still within striking distance of a breakout, but even some of the staunchest of optimists are starting to lose hope.

The good news is, while there may be a bearish outcome in the near-term cards, at least we know exactly where the market's key lines in the sand are.

We'll look at those lines in a second, right after we dissect last week's and this week's economic news.

Economic Calendar

It was a pretty busy week on the economic data front… more than we can talk about at length. We'll have to stick with the highlights, beginning with the biggie - inflation. In a nutshell, we finally have some of it.

As of April, the producer price inflation rate stands at 2.1%. That's the highest reading we've seen since early-2012 (and it was falling then). The annualized consumer inflation rate reached 1.96% last month … the highest reading since mid-2013.

It's important to understand that neither rate is at outrageous, out-of-control levels. The worry is, however, that we may finally be seeing an inevitable result of years of cheap money/low interest rates. If inflation continues to rise and threaten the 3.0% mark, that's a concern. Only time will tell.

It was also a big week for industrial production numbers… but not a great week. Both the Industrial Productivity Index and the Capacity Utilization Index fell in April, for the first time in a while. They weren't precipitous drops, but there wasn't any room for weakness from either. It's too soon to sound the alarm bell just yet, but if May doles out another slide from these numbers, that could be a sign of trouble.

Industrial Production & Capacity Utilization Chart

Source: Federal Reserve

Finally, just when we needed it, we saw signs of a rebound on the real estate and construction front. The pace of permits jumped 80,000, to 1.08 million, while the pace of new housing starts grew by 125,000, to 1.072 million.

Housing & Real Estate Trends Chart

Source: Census Bureau, FHFA, National Association of Realtors, and Standard & Poor's

You may recall that housing and construction numbers have been weakening for months. While we can't presume that one good month for starts and permits is a sign of an across-the-board, long-lasting recovery, it is a reason to keep our eyes open this week. Why's that? Because, as you'll see on the calendar below, there's a lot more real estate and construction data in the lineup for the coming five days. These numbers could make or break the fledgling real estate recovery that may have started last month.

Economic Calendar

Source: Briefing.com

Stock Market Index Analysis

That's the second go-nowhere week in a row. In fact, the S&P 500 (SPX) (NYSEARCA:SPY) closed last week right where it did the first week of March. And truth be told, there's no real evidence that we're going to wiggle our way out of a rut anytime soon. Even so, there are red flags that suggest the odds still favor a more significant correction than we've seen yet.

Let's just start at the top… with a look at the weekly chart of the S&P 500. As the chart plainly shows, the S&P 500 Index once again bumped into a ceiling 1896, but couldn't clear it. This is the same ceiling that was trouble in early April and again a couple of weeks ago. That's also where the upper 26-week Bollinger band is, and as the chart illustrates, it's been a cap too.

S&P 500 & VIX - Weekly Chart

All charts created with TradeStation

Nothing really changes when we zoom into the daily chart of the S&P 500, though we can get a clearer view of exactly why the market is stuck in the mud. There's a lot of converging technical support around 1867, but there's also a lot of (the aforementioned) resistance around 1896. That resistance includes the upper 20-day and 50-day Bollinger bands.

S&P 500 & VIX - Daily Chart

Based just on the index charts themselves, we'd be content to presume the market will be range-bound until traders are ready to shake stocks out of their rut, and that shake has an equal shot of sending stocks up or down. When we take a look at the CBOE Volatility Index (VIX) (NYSEARCA:VXX), however - in both timeframes - we can see it's at rock-bottom low levels that tend to be a bearish problem for the market. Granted, since late-2012 the low VIX has only been a short-term problem here and there. Stocks have managed to inch higher even with the persistently-low VIX, and even when the VIX popped, it didn't destroy the market's rally. But still, a VIX hovering around 12.0 tends to cause at least some problems for the market. The Nasdaq Volatility Index (VXN) is a bit higher than the VIX, as seen in the charts below.

A look at the Nasdaq Composite (COMP) (NASDAQ:QQQ) doesn't necessarily change the "range-bound" assessment, but we can get a little better grip on our range-bound reality by looking at a chart of the composite.

As our weekly chart of the NASDAQ Composite clearly shows us, the bleeding from two months ago finally stopped when the 200-day moving average line (green) stepped up to the plate as a support level. Problem: The Nasdaq - despite valiant efforts - hasn't put itself back into a bullish mode yet. Both the 100-day (gray) and the 50-day moving average line (purple) are still above the Nasdaq's close, and the composite is still obviously below a major long-term support line (dashed) that broke down in April. Still, since then we've remained in a sideways, range-bound situation.

NASDAQ Composite & VXN - Weekly Chart

That premise isn't altered when we zoom into the daily chart of the composite, though we can see in more detail where the boundary lines are. The floor is at 3985 (and has been for a while), while the ceiling is at 4155 (but only has been since early May). The 50-day moving average line (purple) now stands right around there, at 4163, while the 100-day moving average line (gray) is currently at 4175. Either or both could become significant resistance soon, especially considering the composite has defined a horizontal ceiling at that level already.

Nasdaq Composite & VXN - Daily Chart

Being stuck in a broad market (NYSEARCA:DIA) (NYSEARCA:IWM) range can be more than a little annoying, and in this particular situation it's been agonizing - we've gone nowhere for more than two months now. There's a silver lining to this cloud though … the floors and ceilings are very well-defined, and have been proven multiple times. We're still stuck in those confines, and could be for a while. It's going to be crystal clear once we break out or break down, though, and after two months of consolidation, that eventual move should be a trade-worthy one. Just don't jump the gun.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.