Retail Spending Is Helping the Economy

 |  Includes: IYR, QQQ, SPY, VXX, VXZ, XRT
by: Price Headley, CFA

How can there be so much economic data last week, in the shadow of so much momentum from the market, but so little net movement for stocks? Welcome to investing, where logic is hit and miss, and nothing is ever really predictable. We'll look at all the major technical and fundamental events below, and what it's all about to mean for the near future.

Economic Outlook

The market may have closed flat last week, but it sure wasn't because there was a lack of economic data to push it around. Indeed, last week was the busiest week of this month as far as economic numbers go.

Too many to discuss them all.... let's just hit the highlights.

* Inflation wise, there still isn't much for consumers, though producers are starting to feel a little pinch. The annualized inflation rate (CPI) currently stands at 1.14%.
* Retail sales, sans autos, rocked and rolled in November, up 1.2%. Even with car sales though, retail sales were up 0.8% last month.

In fact, retail activity is close to being back at the all-time high levels seen in 2007. Take a look at the raw retail sales levels (U.S. dollars) going back several years. This isn't an index or cumulative figure - this is actually dollars spent in each month on retail goods (minus food). With or without cars, Americans are back to their old consumption levels.

U.S. Retail Sales, Monthly (total, & total minus auto), x 1.0billion

Moving along....

* Industrial production as well as capacity utilization both confirmed the recovery is still getting traction. The former was up 0.4%, while the latter stands at 75.2%. Both are at new multi-year highs.
* Initial unemployment claims are still reaching into new low territory, hitting 420K last week. Ongoing clams are following that same lead, reaching 4.135 M two weeks ago (which wasn't a new low, but still easily part of a bigger downtrend).
* Housing starts were up to 555K in November, while building permits fell to 530K. The former was above expectation, but the latter was below the anticipated numbers. Overall, the construction industry is still just treading water.

Here's the raw data.

Economic Calendar

As for the coming week, much less is in store, though what's in the lineup should be important. All the data, however, is compacted into Wednesday and Thursday.

We'll get a better feel for how the real estate market is progressing when we hear Wednesday's existing home sales and new home prices, followed by Thursday's new home sales. Existing homes should have sold at a slightly brisker pace of 4.65 million, and new home sales are expected to have sold at a slightly better pace of 303K last month. Better is better, of course, but most housing numbers still seem to be stick in tepid territory in the grand scheme of things. Take a look.

Construction and Real Estate Activity
121910-REAL-ESTATEClick to enlarge

On other fronts, it will be interesting to see if Thursday's personal spending and personal income levels jive with the revival of retail sales numbers and trends explored above. Both are only expected to be a tad higher for November (up 0.5% and 0.2%, respectively), but not having adequate income hasn't always meant a purchase wasn't made. The University of Michigan Sentiment Index may well underscore this reality when it's released on Thursday.

S&P 500

Thanks to a late push on Friday, all the major indices made it back in to the black last week; the S&P 500 closed 3.51 points (+0.28%) above the prior week's close. In fact, the close at 1243.91 was a new high close as well, carrying the market further along this unlikely rally's path. Now, thanks to the calendar and the expectation for the so-called Santa Claus rally, the tensions of this scenario are doubly anguishing.

In simplest terms the market is well overbought, but it may not matter a bit...yet.

On the bearish side of the fence...

* Slice it any way you want to, as no matter how you do it, it's impossible to say the 18.5% romp from late August - totally unchecked, mind you - is reasonable and sustainable. Were it the first leg of a new bull market (or even in the first year of an economic recovery), maybe. Now though, this giant gain is just a lot of weight to carry around.
* The upper Bollinger band (orange) at 1245 is still in play, and still has a good shot at keeping a lid on the rally long enough to wear the buyers out, and ultimately force them to give in.
* As strange as it may seem, the VIX's plunge and Friday's volume spike may have been - or possibly caused - the blowoff top kind of action that tends to occur at market tops. Think of it as a last hurrah.

The bullish arguments right now include...

* The momentum is undeniable, and though it feels impossible, so far it's also been unstoppable.
* The calendar says it's time to be bullish. Logic and the leading-up-to scenario don't factor into it a whit, but this time of year (and especially the last week of the year) is usually bullish. Maybe people are in a good mood, or maybe they just have some holiday time off to study and get into stocks before the New Year arrives. Whatever the case, there's often a self-fulfilling bullish prophecy playing out right around now.
* The NASDAQ and small caps took the lead again late last week, up-ending the previously emerging leadership of the Dow Jones Industrial Average. So what? Tech and small stocks tend to lead the market, whether it's higher or lower. And, it looked as if the leadership torch was being passed to the Dow's blue chips and the S&P 500's more stable large caps at the beginning of last week. That trend was reversed before it ever had a chance to develop though.

All that being said, the artificial feel to the market's strength, and the likely artificial strength we may see unfold over the next couple of weeks, leaves something of a bad taste in the bulls' mouths. And, the clear risks continue to peck at our heels.

The 18% runup over the last 16 weeks is now the biggest bullish stretch we've seen during this bull cycle except for the initial 30% rebound run from March of 2009; the 3.7% pullback we saw in November just doesn't seem to cut it as far as healthy corrective moves go.

Although still in charge (which could change in an instant), the bulls are on borrowed time here. A little more bullishness through the end of the calendar year would actually setup the potential for a scary-sized correction to kick off the new one, a la 2008, 2009, and 2005.

Either way, the lower Bollinger band line and the 100-day average line at 1153 still seem to be beckoning the S&P 500. If not now, soon.

S&P 500 Chart
121910-sp500Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.