Just when it looked like the bulls were ready to make a decent pushback, a little bad news goes a long way, pulling the rug out from underneath the effort. All told, stocks sank another 4.8% last week. They didn't hit new lows, but they did hit the lowest weekly close we've seen since September of last year.
Is this the beginning of the end and an omen of far worse to come? The perma-bears would have you think so. Before jumping to any conclusions, however, let's at least look at things in a scientific light. Before we even do that though, let's look at the backdrop of economic data. After all, with all eyes on it now, it could literally make or break the market's chances of a rebound.
Last Week's Economic Calendar
It was a loaded week on the economic front, particularly for the real estate and construction market. But, the data for this segment of the economy was less-than-impressive.
Both building permits and housing starts slumped compared to June's numbers, and both rolled in at levels less than expected. Part of that is seasonal, but the part that's most troubling is the part you didn't hear
both numbers were well under July 2010's numbers. That can't be dismissed as a seasonal lull, since the comparable is the same season from a year earlier. Existing home sales fell as well, from a rate of 4.84 million to 4.67 million. Not good.
On the inflation front, we're seeing it, but it's not stifling… yet. The producer price inflation 'rate' now stands at 7.2%, though it's been in that range for four months (and above 4.0% for six months). The consumer inflation 'rate' is now 3.6% (where it's held steady for four months). The figure counts food and energy. Taking those out of the equation, the 12-month inflation rate is a mere 1.8%.
Even the good news about the economy last week was just mediocre. Capacity utilization and industrial productivity - both of which have shown strong correlation with long-term bull and bear markets - came in at only moderately higher levels in July. It's better than shrinkage, but neither was strong enough to dissuade fears of a recession.
As always, details along with the rest of the key data are below.
For the coming week we'll see more real estate information, though it's a light week otherwise. New homes sales are expected to roll in a hair lower for July, though given last week's disappointing housing/construction numbers, don't be surprised if Tuesday's release falls short of that expectation.
Durable orders on Wednesday should also be market moving. The market's expecting a 2.0% increase, though it's all cars. Take autos out of that equation, and the pros are actually looking for a 0.4% dip (at a time when the market just can't afford it).
We'll get unemployment claims on Thursday, of course, but the biggie will be Friday's 2nd estimate of Q2's GDP growth figure of 1.1%. You may recall this tepid number already rocked stocks when the first guess was posted, and the second number isn't any different. Given how high tensions already are about the economy though, even a modest revision downward could be back-breaking (likewise, a decent upward revision may spur a buyback of this now-oversold market).
We're changing the look of our charts this week just a little bit, to focus on the themes that are most important. First things first though…vital stats:
The S&P 500 (SPY) fell 55.3 points last week to close at 1123.53. It was nearly a 5.0% plunge (most of which was Thursday), and left the SPX down 16.5% from the near-peak close of 1345 four weeks ago. That's right - a 16.5% dip in just four weeks (and we had been even lower at one point two weeks ago). Even more painful is that we're now down 21.3% from May's peak, which if you want to get technical about it, puts us in bear market territory.
And who knows? Maybe the bears are so convinced we should be in a bear market that they'll (literally) talk and sell us into one.
Before getting on the apparent bandwagon though, there are a couple of things you should know.
One - and perhaps the biggest - is that last week's selling wasn't on heavy volume. Oh, the sellers came out in some numbers with Thursday's rout, but nothing like the selling volume we saw when things were at their worst two weeks ago. And, Friday's dip was on very modest volume.
On the flipside, the volume on the way up early last week wasn't anything to write home about.
Point being, until either side starts showing us some consistent volume, the market's actually most apt just to bounce around and make no net progress… not unlike the four months that followed last year's Flash Crash.
One thing the bulls have going for them here is that the CBOE Volatility Index (VIX) (VXX, VXZ) hasn't acted as if it wants to move any higher or punch through not just the upper Bollinger band, but also through its peak of 48.40 two weeks ago.
SPX & VIX Daily Chart
Things get really interesting when we take a step back and look at an updated weekly chart. From here we can see that last week's close (and near-low) of 1123.53 was a key level while the S&P 500 was finding its footing after the Flash Crash last year. Granted, it was a ceiling then versus a floor now, but prior ceilings become important floors, and vice versa.
Will that happen now? It's difficult to say. As was said above, valuation has nothing to do with anything now - this is all emotion, and if traders are talked into being bears, then they'll act like it too. That could mean a move lower (under 1253), maybe even to 1042, which were key lows all throughout the middle of last year. Before making that bearish bet though, know that the S&P 500, on a trailing 12-month P/E basis, is as cheap as it's been since 1991. Moreover, Q2 earnings were a second-best…. ever.
In other words, the selling we've already seen on top of anymore we see from here is nothing but a bet on a recession. That's a dangerous bet though, seeing as how we tend to predict far more recessions than actually materialize.
We can also see on the weekly chart how the VIX has peaked at the same peak level seen after the initial pullback of the Flash Crash last year…. one of many suspicious (and generally bullish) parallels.
SPX & VIX Weekly Chart
So where does that leave us for this week? Basically, in limbo. The market's way oversold and ripe for a bounce - of that there's no debate. The majority of traders need to agree though, and right now, that seems like a long shot, especially with weak and disappointing economic numbers starting to roll in.
The best near-term shot at bullishness will come early in the week, with support at 1123 holding up and sparking a rebound. If it fails, then 1042 is the next likely target level.
Either way though, we're still likely to be stuck in a rut through the end of September, as most traders and investors are disenchanted at best, and disinterested at worst. The only thing that will cure apathy is time, and some optimism stemming from decent Q3 earnings beginning in October.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.