Weekly Market Outlook: Uptrend Is Battered, But Not Yet Beaten

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

Though the bulls are still not down for the count yet, the bears landed a brutal one - two combination this past week that is definitely putting the broad uptrend into question. The tipping point is just inches away.

We’ll draw some detailed lines in the sand below, but first, a quick rundown of the bigger-picture economic numbers from last week and the coming week.

Economic Data

Real estate and economic activity dominated last week’s few headlines, from start to finish.

On the business activity front, the Empire Manufacturing rolled in higher, up to 11.92 from 9.89. Friday’s Leading Indicators and Philadelphia Fed Index scored a 1.0% increase and 19.3, respectively. Though both were slightly lower than the prior month’s levels, each was right around expectations and still positive.

The housing market limped to slightly better levels as well. Existing home sales transacted at a pace of 5.28 million – the best in months. The MBA Mortgage Purchase Index was up 5%… also the best in a long time. The NAHB Housing Market Index for January scored the expected 16, which was the same level as December.

The only sore spot was housing starts – they came in at an annualized pace of 529K, which was well under the anticipated 550k, and short of the prior month’s 553K. Yet, building permits soared from 544K to 635K (annualized) in December, easily topping the expected 560K.

Here’s the rest of the numbers.

Economic Calendar

The coming week will round out the real estate picture, with the Case Shiller Index and the FHFA Price Index being unveiled on Tuesday; the former is expected to have sunk 1.3% for November. New home sales should edge up from 290K to 300K for December, while pending home sales (look for it on Thursday) is expected to have fallen 0.5% last month.

Sentiment-wise, Tuesday’s consumer confidence as well as Friday’s Michigan Sentiment Index should both be higher.

S&P 500:

Despite the hard-fought – and victorious – battle to stay in the black on Friday, the S&P 500 still sank last week; it was the second losing week in the last eight. Though it was only a 9.89 point (-0.77%) tumble under the prior Friday’s close, it was enough to cast some real doubt on the near-term future of this rally.

The good news for the bulls is that the axe hasn’t fallen yet. For the SPX, that’s a move under the 20-dat moving average line at 1272. With the SPX closing at 1283.55 on Friday, there’s still some wiggle room, though it should be noted the index attacked the 20-day line (blue) on Thursday. It held up as a floor then, but…

While the VIX finally made the firm push higher on Friday, don’t forget it was an expiration day, which may have artificially pushed the VIX upward. However, once the market does rollover for real, last week’s push is what it would look like. Only when stocks rollover for real, the VIX’s upper Bollinger band at 20.98 won’t cap it as it did back in late November.

So, here’s how to handle it – stay cool, and don’t force it. Trading based on what you think the market “should be” doing is a tricky dance. You’re better off waiting to see what the market really “is” doing.

If the 20-day line fails to act as support and the VIX continues to rise, that will signal a nail in the coffin. Anything less, and the bulls still have a glimmer of hope.

SPX & VIX Chart

NASDAQ Composite:

To keep things interesting, and to offer a much-needed perspective, it’s worth taking a look at the NASDAQ’s chart as well this week… mainly because it didn’t pass its test at the 20-day moving average line at 2700.2. After a temporary dip under it on Thursday, the bears pushed hard enough on Friday leaving the composite at a close of 2689.54.

Though it’s still not in an inescapable downside scenario, the wall just got much higher. And it’s with the NASDAQ’s chart that we can start to think about potential downside targets if the bulls can’t get enough mojo going to crawl back above 2700 this week.

At this point, the 2507 area offers the most support. Not only do we find the lower 50-day Bollinger band there, but that’s also where we can find the 100-day line…. not that either has been validated as a floor in recent history. It’s been so long since we’ve had to worry about a floor though, that area makes the most sense.

Besides, from Tuesday’s peak of 2766, a slide to 2507 would be about a 9.3% dip. That sounds like a big number on the surface, but in reality it would be a normal and healthy bull market correction.

Oh, and the same interpretations and hesitations that applied with the SPX’s VIX Also apply to the NASDAQ’s VXN.

COMP & VXN Chart

Sector Performance:

Not only are the major market indices flashing signs of near-term trouble, but the stocks that investors are choosing to buy now are suggesting they’re thinking and planning defensively.

Last week’s winning sectors? The ultra-safe utilities stocks, with a gain of 1.44%. In second place were the highly-reliable telecom names, which is particularly telling considering telecom was a bearish mess just the week before. And just to put this paradigm shift into perspective, these two leading sectors from last week were the big six-month laggards just a few days ago. Change indeed.

At the bottom of the barrel were basic materials (off by 3.0%), and then technology (down 2.12%). Again, it’s a stark change from the way these two arenas were read hit just a couple weeks ago.

Sector Rank

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