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Our deepest condolences to the people of Japan and hopes that the suffering there is limited.

It may have been a valiant effort from the bulls on Friday, but it wasn’t anywhere near enough to push the market back into the black for the week. In fact, it was the second losing week in the last three, and the biggest threat to the market since November’s blip.

So is it finally time to pay the piper? We’ll figure it out in a second. First, let’s start our top-down approach by looking at the recent and upcoming economic numbers.

Economic Calendar

Not a lot to go over for last week, though what we saw was mostly good. Here are the highlights.

  • Consumer credit levels are still growing quite nicely; deflating the theory that consumer spending is dead in the water. It swelled $5.0 billion in January after December’s $4.1 billion increase.
  • Retail sales were up 1.0% in February, though car sales helped. Without autos, they were only up 0.7%. Both topped expectations, and both topped January’s smaller improvement.
  • Initial claims rose from 371K to 397K a week ago, while continuing claims came in even at 3.77 million two weeks ago.
  • The Michigan Sentiment Index fell from 77.5 a month ago to 68.2 (first reading) in March.

Here’s the rest of the data.

Economic Calendar

(Click charts to expand)

The coming week is going to be much busier, as you can see, though nothing heavy is being released until Wednesday. On Wednesday, housing starts are expected to have fallen from 596K (annualized) to 570K; though building permits for February should have grown from 562K to 573K. Producer inflation also comes out Wednesday, and should be up 0.6%, though only up 0.2% on a core basis.

Thursday will be a huge day, with continuing and new unemployment claims both expected to have fallen a tad. We’ll also hear about February’s inflation (CPI) changes; it’s expected to be up 0.4% again, and only up 0.1% on a core basis.

Thursday’s last data release – and also the last for the week – is last month’s industrial production and capacity utilization numbers. Both should be up compared to January’s results. More important, both are still in long-term uptrends that bode well for the long-term market. Unfortunately, these uptrends can’t stave off a short-term correction.

S&P 500 Index

All told, the S&P 500 (NYSEARCA:SPY) fell 16.87 points last week, closing at 1304.28. That’s a 1.2% dip, with most of it coming on Thursday. We’re now 2.9% under the peak from mid-February and a little deeper underwater.

Perhaps more important, though it didn’t close there, the SPX made a lower significant low on Thursday/Friday. Friday’s low of 1291.99 was a hair under 1294.26, but has followed a string of lower highs since the mid-February peak. In fact, the falling trading ranges appear to be accelerating downward now.

We recently pointed out that the 50-day moving average line at 1301.75 was under attack, and that if it fell, things could go from bad to worse in a hurry. Though we watched the SPX move back above it on Friday after opening under it – and closing under it on Thursday – this contest is still in question. And, the bears still seem to have the lead in the grand scheme of things.

If we see another close under the 50-day average line (purple), that should be enough to inspire enough selling to drive the S&P 500 down to its combined lower Bollinger band and 100-day moving average line at 1257. That doesn’t mean the bleeding will necessarily stop there. It just means that’s an inflection point. Be on the lookout.

SPX and VIX Daily Chart

You can also see on the daily chart that Friday’s bounce was a low-volume effort (though so was Thursday’s selloff). And, the CBOE Volatility Index (NYSEARCA:VXX) (NYSEARCA:VXZ) is trending upward as well. While the VIX fell sharply on Friday, for the first time in a long time it’s starting to push its upper Bollinger band upward again, rather than being repelled lower by it.

The weekly chart below, however, really puts things (like how overextended we are) into perspective.

Yeah, it’s the same chart we showed you last week. Nothing’s really changed with the undercurrent though. After a 26.2% rally since the end of August, the weight of the big gain is simply too much to bear. It’s with the weekly chart you can also see just how little of a correction we’ve turned over so far.

It’s also on a weekly chart we can see the paradigm shift the VIX has been making.

SPX and VIX Weekly Chart

The bottom line here is real simple….the deck is still stacked against the market. The total size of the corrective move so far is only about 3%, where the ‘normal’ bull market correction falls in a range of 10% to 15%. For reference, a 12% dip from the peak four weeks ago would put the SPX around 1181, where the 200-day moving average line is now.

Sector Performance

Though the market took a hit last week, not every sector got dunked with it. In fact, there was a clear and logical theme to the winners and losers.

The winners were consumer staples (NYSEARCA:VDC) with a 0.22% rise, and then utilities (NYSEARCA:XLU) with a 0.11% gain. That’s not a big win in either case, but think about it… they’re the most defensive sectors out there. It’s an indication that whether they should or not, investors are migrating to safer arenas; they may well create a self-fulfilling prophecy.

On the other end of the spectrum were basic materials (NYSEARCA:IYM), losing 3.5%, energy (NYSEARCA:XLE), losing 3.2%, and technology (NYSEARCA:XLK), losing 1.6%. These are the areas that would be fled first and fastest if trouble was brewing.

Here’s the usual visual comparison, telling not just the short-term story, but also where the short-term story fits into the longer-term one.

Sector Performance

Source: Weekly Market Outlook: Rising Long-Term Volatility Is a Concern