Seeking Alpha
Short-term horizon, newsletter provider, ETF investing, option trading
Profile| Send Message|
( followers)  

The market managed to make a third straight week of gains, and the 20th weekly gain in the last 25. We’re now up 26% since the end of August thanks to what’s been a surprisingly persistent rally.

We’ll look at the upside and downside in a moment, but first, there’s quite a bit of economic data that actually matters that we need to work through first.

Economic Calendar

There’s too much info to detail all of it, so here are the highlights from last week’s economic data.

  • Retail sales, with or without autos, were up 0.3%, though that was shy of December’s growth rate. Total retail sales levels for the U.S. are now back up to all-time peak levels.
  • Housing starts were well up, from 520K to 596K, while building permits fell from 627K to 562K in January. Construction remains at mere maintenance levels.
  • Producer inflation is starting to creep in. PPI was up 0.8% in January, while Core PPI was up 0.5%. Higher food costs and oil costs are the main culprits, and neither is going away anytime soon.
  • CPI (regular inflation) was up 0.4% last month, while Core PPI was up 0.2%. The inflation "rate" is now 1.63%, which is the highest it’s been in a normal (not being compared to a deflationary environment) period since late 2008. While rattling, that’s actually not an unhealthy level.
  • Industrial productivity was down 0.1% last month, while capacity utilization slumped from 76.2% to 76.1%. That’s not a surprising or problematic post-Christmas decline, and both data sets remain on long-term uptrends.

Economic Calendar

[Click all to enlarge]

As for the coming week, much less is in store:

  • Tuesday’s consumer confidence is expected to have risen from 65.6 to 67.0 for February.
  • Wednesday’s existing home sales likely slumped from a rate of 5.28 million to 5.23 million.
  • Thursday’s durable orders for January should be up a whopping 3.0%, though that number will have only swollen by 0.6% not counting transportation orders.
  • We’ll also get new homes sales levels on Thursday; analysts expect a slight decline to a rate of 310K.
  • We’ll hear the final Michigan Sentiment number on Friday; it’s expected to roll in at 75.1.

S&P 500

The SPX gained 13.86 points last week (+1.0%), further extending an incredible – and unlikely – rally. Progress was made every day except Tuesday, even if it was minimal progress each day. In fact, those minimal daily gains may well be the reason the broad market has managed to keep making progress.

So far, we’ve yet to see the S&P 500 index close to, or barely even with/above, its upper Bollinger band throughout this five-month rally. Most major tops occur with a brilliant burst of bullishness that extends well above the upper band, and usually on a volume surge. The very moderated pace we’ve seen since August has pre-empted either of those two events occurring. Ergo, we’ve not seen a scenario where the majority of the market has decided it’s finally time to start taking profits.

On the other hand, in the shadow of a 26% rally, and when the index is now a stunning 15% above the 200-day moving average line (green), we may not see a blowoff top when the next top is made. Instead, the strength may just quietly fade away. Indeed, we may finally be seeing some evidence of such a scenario now.

Take a look at the daily chart of the S&P 500 below, for perspective.

S&P 500 – Daily

The rally appears even more impressive with the weekly chart below, but two subtle things become a little clearer on the weekly chart.

The buying volume is fading. The green (bullish) volume bars since early September had been steadily getting taller, but over the last three week they’ve been getting shorter and shorter. The number of buyers is shrinking now, and actually has been for over a month.
Though we don’t want to read too much into the VIX’s chart from last week (since it was potentially skewed by expiration), we’ve seen the VIX not budge under 15.1 since late December -- even though the market has continued to reach higher. The two should be inversely correlated. The fact that they’re not hints that traders aren’t nearly as confident as the index makes them appear to be. That’s often a bearish omen, even if it can’t pinpoint the turning point.

S&P 500 – Weekly

It’s tricky, to be sure, to reconcile the bullish momentum with the clear likelihood that the bulls could yield to the bears at any time.

While the trend remains bullish, this really isn’t a time to start adding new long or bullish trades. The key bear/sell signal, however, will likely be the VIX crossing above its falling resistance line (green) on the weekly chart, and a decisive reversal bar from the SPX on a weekly chart. Some strong selling volume behind that move would really seal the deal.

Until then, as uncomfortable as it may feel, the bulls technically remain in control.

Sector Performance

It would be difficult to say last week’s leadership from the consumer staples sector was a "flight to safety." Though staples were up 2.1%, utilities also appeared in the bottom half of the sector rankings. Telecom was up too, by 1.3% (better than average), while technology was near the bottom of the barrel with a 0.6% gain. There’s a glimmer of defensive thinking in there, but it’s not a strong enough hint yet.

Sector Ranking – One Week

As for the bigger sector picture, it’s clear energy was/is still the place to be. It took the lead in late January and hasn’t looked back since. Likewise, utilities being bottom-dwellers isn’t anything new either.

The only noteworthy emerging trend we’re seeing here on the comparative chart is the way the services sector has started to pass most others in the bottom half of performers. It’s a fairly non-descript sector, so if you’re going fishing, there’s still some homework to do to find the leaders. It’s clearly a stronger group though. (And yes, we know there's no "services" on the ranking grid ... a nuance of using two different data sources. Most of the service group overlaps with the consumer discretionary sector, if that helps narrow down which stocks are doing most of that work.)

Sector Comparison, since November 30th.

Source: Weekly Market Outlook: Energy and Consumer Sectors Making Big Moves