Despite Friday's rebound, it wasn't anywhere near enough to offset steep losses suffered in the middle of the week. Yet, even the pullback doesn't necessarily mean the rally is over, since the bears didn't actually push the market under any key support levels. All the dip did was give back a modest piece of the prior week's big 2.4% advance.
So now what? Well, as the saying goes, "The trend is your friend (at least until it isn't)." As overdue as a correction is, that doesn't mean the bulls won't keep defying the odds. We'll dissect the red flags of a real correction in a moment. First we want to start with the bigger economic picture.
The big news last week mostly came on the real estate front, and it was all good. Housing starts poked above an annual rate of 700K, and permits reached an annual rate of 695K. The strong numbers continue a growth streak that started in April of last year. Existing homes sales edged upward just a tad, to an annual rate of 4.61 million, while new home sales rolled in at a rate of 321K again. None of this is to say the real estate market is back to what it was in 2007, but things are getting better.
Speaking of getting better, we also saw more progress on the unemployment front last week. Both are at multi-year lows, with initial claims hitting 355K last week, and ongoing claims reaching 3.363 million. Though it wasn't part of last week's data set, the total number of employed Americans is rising, and the total number of people who are not working - whether they're receiving any kind of benefit or not - is shrinking. It's not "good", but it's getting measurably better.
All the rest of last week's numbers are on the table below.
(Click to enlarge)
We'll get a little more real estate data this week, but the big story will be Wednesday's durable orders number for February, and Friday's personal income and personal spending updates. The former is expected to be up 1.0% not counting autos, and up 2.5% with cars. (Of course, even those big improvements don't offset the prior month's big plunges.) The latter is supposed to be better too, with incomes up 0.4% and spending higher by 0.6% last month.
It's also going to be a big week for consumer confidence measures. The Conference Board's consumer confidence reading for March is expected to drift a little lower, from 70.8 to 70.0, while the Michigan Sentiment Index is expected to be finalized (for March) at 74.3. That's a pullback for both for the month, but both are in rather sharp bigger-picture uptrends. And, both also still have plenty more room to rise before reaching what could be considered excessive levels.
When it was all said and done, the S&P 500 Index fell 0.5% (-7.06 points) to close at 1397.11. Volume was modest.
It was the first losing week in the last five, and only the third in the last fourteen weeks. More than that though, the pullback from last week doesn't disrupt the overall uptrend the market's been in since mid-December. Ergo, we have to remain in the bullish camp based on the present momentum. Yet, we also have to acknowledge this rally has now reached historical limits.
Just for perspective, let's open up with a weekly chart of the S&P 500 this week to explain the case the bears are making.
Between December and 2010 and February of 2011, the S&P 500 gained 13.8% over the course of 59 days. Before that, the index rallied 16.8% gain over 47 trading days. In early 2010, the S&P 500 gained 14.4% in 58 days. Over the past 72 trading days, the S&P 500 has gained 15.9% (but had been up as much as 17.3% a couple of weeks ago) . Point being, the current rally has already exceeded most time and distance norms.
That's not to say it can't keep going. It is to say, however, we're getting into unusual territory where it would be wise to be skeptical. Take a look at the weekly chart of the SPX & CBOE Volatility Index.
S&P 500 - Weekly
The problem with any bearish theory at this point is that we haven't seen any real clues the bulls are giving up. Oh, we've seen a couple of blips, but the blips have only materialized after exceedingly bullish weeks… a bit of a pullback could have been expected.
The good news is, though, we at least know where the bearish lines in the sand are.
For the S&P 500, a move under the 20-day moving average line (blue) at 1381.12 would be a meaningful first step. The index fell under it briefly back on March 6th, but the market immediately recovered. Until we see it happen again, we don't even need to worry about a pullback.
The real make-or-break level, however, is around 1342/1352, where the lower 20-day Bollinger band (gray) and 50-day moving average line (purple) are close to intercepting. As you can see, the lower 20-day Bollinger band was the push-off point for the rebound in early March; we can reasonably assume it's still a key floor. A move to that level from the recent high of 1414 would only be a 4.7% dip, though that's enough to bleed off enough of this overbought pressure and the let uptrend renew itself.
If the 1342/1352 area doesn't act as a support level, then the next one is 1288.3, where the lower 50-day Bollinger band (orange) and the 200-day average line (green) have intercepted. A move to that level would be an 8.8% correction, which is more in line with a normal, healthy corrective move.
S&P 500 - Daily
First things first though. The overall uptrend in the broad market indices is still intact, and will be until further notice.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.