The light week in terms of economic news didn’t stop the bulls, who chose to be fueled by the Mubarak/Egypt news instead. Can they hold onto the latest rounds of gains? That depends on whether it was deserved and sustainable or not. See, in the short run, emotions rule the market. Eventually, though, common sense and the bigger ebb/flow come back into play. Here’s a look at where we are in that bigger cycle:
It was a very light week last week in terms of economic data, so a review won’t take long.
The week kicked off with a huge increase on consumer credit levels, jumping from November’s $2.0 billion increase to December’s $6.1 billion pop. The pros were looking for an increase of $2.5 billion
New unemployment claims slumped from 419K to 383K, while ongoing claims fell from 3.935 million to 3.888 million. Though these total numbers still don’t reflect the true unemployment claims picture (the emergency benefits figure pushes the total above 9 million), job losses are still trending lower.
Jobless Claims Weekly Chart
Finally, the Michigan Sentiment Index for February rose to 75.1 from 74.2, though this was only a first estimate – it will be revised a couple more times for this month.
This coming week will be much busier.
The ball gets rolling on Tuesday with last month’s retail sales report; look for a 0.5% increase, but a 0.6% increase without auto sales.
Wednesday’s housing starts and building permits will update us on the health of the construction market. Starts are expected to rise from 529K in December to 540K for January. Permits are estimated to have fallen from 635K to 580K last month.
We’ll also hear the latest on inflation on Wednesday as well as on Thursday. Producer price increases will be unveiled on the 16th, and should be lower than last month’s 1.1% increase. The experts foresee a 0.7% improvement (which is still quite a jump). The core number for PPI should be 0.2% again. Consumer inflation will be posted on Thursday; look for January’s inflation rate to slide from 0.5% to 0.3%, with core CPI holding at 0.1%.
The biggies for the week will be Thursday’s capacity utilization and industrial productivity. The former should grow to 76.4% from 76.0%, while the latter’s growth pace should slacken from 0.8% to 0.6%. Even so, these are both important longer-term "tells," and as long as both are pointed upward (from any level), that’s good for stocks … and both have been trending higher for quite some time.
Last week’s new and continuing claims are forecasted to inch higher when released on Thursday.
S&P 500 Index (NYSEARCA:SPY)
Simply amazing. For the ninth week in the last 11 – and the second in a row – the SPX has tacked on gains. Last week’s advance was an 18.28 point gain, or 1.3%. The index also reached new multi-year highs. Since August’s low, we’ve gained a stunning 23.0%.
Feel like you’re missing out? Technically you are, but there’s a little comfort in knowing the market truly is pressing its luck. And there are a couple of clues that the S&P 500 is finally running out of steam.
The first and biggest one is that the upper Bollinger band is now pointing lower. There’s still a chance that some persistent buying here could force the upper band upward again, but that’s the low-odds outcome from this scenario.
Second and more subtle is how the CBOE Volatility Index (VIX) is not moving lower while the market moves higher. Rather, the VIX is hitting a floor at 15.60, as it has since December. It’s a modest suggestion that there’s not as much backing behind this rally as there seems to overtly be.
(Of course, the VIX could fall below the 15.60 level at any time, while the SPX could push through the upper Bollinger band rather than be trapped by it. Such a dual move has the potential to jumpstart yet another leg of rally, or it has the potential to be a blowoff top ... welcome to trading, and trying to guess what’s going on in the market’s collective head.)
The solution to the dilemma is simply to wait for a trading scenario with a little more certainty. As ripe as we are for a pullback, we can – and should – wait for the S&P 500 to slide under the critical 20-day moving average line at 1300 before assuming the worst. Otherwise, the bulls are still technically in charge.
Just for good measure, let's take a quick look at the Nasdaq’s chart (though it’s pretty much telling the same story). While the composite also made a nice gain last week, as it has for the last four months, it too has run into an upper Bollinger band that is now sloped lower for the first time in a very long time. If comparable past scenarios like this are any clue, the market is struggling here much more than it seems to be on the surface.
As was also the case with the S&P 500, however, being ripe for a pullback doesn’t inherently mean one is coming. Let’s use the Nasdaq’s 20-day moving average line at 2747.6 as a make/break level here as well (even though that’s not been a bulletproof "tell" recently).
Most sectors posted nice gains last week, but a few of them really picked themselves up off the mat. Take transportation for instance, which had been lagging, but soared last week. The same goes for telecom. Industrial stocks had been doing just fine on their own already (in second place since late November), but really hit the accelerator last week.
At the bottom of the totem pole you’ll find utilities – again – and healthcare wasn’t exactly hot either. One of the other surprising laggards last week, however, was energy -- the leader of the 2011 rally so far.
While any pullback is likely to zap all sectors to various degrees, we’re still seeing enough of a shake-up here to really start planning on reworking our sector biases; you should too. While we’re not advocating blindly plowing into the six laggards and pouring out of the five leaders, it is time to start respecting the market’s sector dynamics.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.