How Much Longevity to the Bullishness?

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 |  Includes: DIA, QQQ, SPY, VXX
by: Price Headley, CFA

Not bad - the fourth winning week in a row, and a pretty good one at that. The market gained 2.0%, even if it was all made on the last day of the week. It was inspired by good economic news (real good news...not the "let's pretend it's good" variety) too. Any longevity to the renewed bullishness for option trading? It's always possible, but for the reasons explained below it looks like it'll be tough to move higher without some sort of pullback first. It won't have to crush the market though.

Economic Calendar

It wasn't an excessively busy week last week in terms of economic data, but what we did get was important. From the beginning...

On the housing front, we saw mostly improvement. Starts and permit requests were up (to 598K and 569K), and higher than expected. Existing home sales were up again, at 4.1 million. Home prices slipped a hair (-0.5%), and new homes sales remained at rock bottom though.

Employment-wise, though not disastrous, new and ongoing unemployment claims crept higher, to 465K and 4.489 million, respectively. Both were in the middle of the range for the last several months. Nothing to celebrate, but nothing to fret over either.

The week ended on a positive note though, with durable orders up 2.0% sans transportation (though down 1.3% when factoring in planes, trains, and automobiles). The Fed's leading indicators also improved by 0.3%, topping expectations for a 0.1% upswing.

Economic Calendar
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For the coming week, we've got more in store, and it's all just as important.

We'll round out the real estate picture with Tuesday's Case-Shiller Index.

Sentiment-wise, we'll also hear the consumer confidence number on Tuesday, and follow that up with the finalized Univ. of Michigan Sentiment Index on Friday.

Economically speaking, we'll get the third estimate of Q2's GDP on Wednesday...it's still apt to be in the 1.6% area. Income and spending are both forecasted to be up 0.3% on Thursday. Construction spending as well as the ISM Index are anticipated to be reeled in a little; we'll know for sure on Friday. We'll also hear about auto sales figures on Friday, which as of the last outlook should be roughly even with last month's numbers.

S&P 500

Has the tide finally turned, or not? Judging solely from the S&P 500's action on Friday, it would be easy to say it has. When you take just a couple of steps back though, the technical problems become clear again for options trading.

The obvious one is still that upper Bollinger band (orange), currently at 1152, versus the SPX's close at 1148.67. Yes, this is the second attack on the upper ban in the last five days, and the band is indeed pointed upward now. There's a not-so-great history with the upper Bollinger band though. Knowing this, we're still not in a position to be exceedingly optimistic despite the apparent momentum.

And we wouldn't deny that tempering any optimism is tough to do, now that the 20-day moving average line (blue) is going to cross the 200-day line (green); the 50-day is above the 100-day too. Given all those crosses, it's tough to make any real bearish arguments. S, we won't - it's only a short-term pessimism at this point, mostly because the S&P 500 is simply over-extended.

The other two bearish red flags right now are the weak volume we saw behind Friday's move, and the fact that the VIX didn't really match up with the S&P 500 in terms of the equivalent progress lower.

Yes, Friday's volume was the highest volume day of the week. Considering the size of the gain though (almost up 2.0%), there should have been a little more.

As for the VIX, it's yet to push under its recent support line (dashed) at 21.5. It's still knocking on the door, but it needs to break the floor at the same time the S&P 500 proves the upper Bollinger band isn't going to be a problem.

Falling back and finding support at its key moving averages - around the 1100 at the worst - and then restarting the uptrend would actually be a more plausible breakout for the S&P 500 than continuing on from these already-overbought levels. Plus, it would allow a second chance for the now-missing volume to materialize.

The same premises apply to the other indices as well and for option trading strategies.

S&P 500
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Sector Performance

Surprise surprise - the consumer discretionary stocks made their way back to the top of the heap, as investors once again found visions of bullish economic sugar plums dancing in their heads. At this point, it's a trend that's been persistent enough to bank on for the long haul; check out its results over the last twelve months.... second only to gold in most timeframes. Technology ran a close second, and given the deep undervalued nature of the group, that too is a trend worth tapping.

The bottom of the pile speaks for itself.

Sector Rank
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Style Performance

Small cap growth won the week...by far. In fact, it's won the last couple of weeks. As long as the market stays reasonably bullish, look for that trend to last. That being said, there's a clear bias for growth over value.

Style Rank
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Industry Performance

It's pretty clear what was driving the consumer discretionary sector higher last week, but take a look at two of the top five industries...basic materials. Metals, to be specific. It's more than a mere coincidence.

On the flipside, it's also clear where the financial sector's weakness came from - banks and brokers. Note that most of last week's losers have been habitual losers, something to keep in mind for your stock option trading strategy.

Industry Rank
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Disclosure: No positions.