Odds Favor The Bears Here - Weekly Market Outlook

 |  Includes: DIA, IWM, QQQ, SPY, VXX, VXZ
by: Price Headley, CFA

The week started out sour, and ended sour. A big bounce on Wednesday and Thursday wasn't enough to change the fact that stocks just took their second weekly loss in a row... for the first time since November. As if that weren't bad enough, Friday's dip pulled all the major indices under a major technical floor that - now breached - says the bearish train has some momentum

We'll poke and prod the near-term chart in a second. First, let's take a look at how the economy hurt or helped the market's effort, and what the economic numbers are apt to do this week.

Economic Calendar

Last week was fairly well loaded with economic data, though not much of it was all that important. Inflation was last week's 'big deal', though the inflation rates were pretty much on target. Specifically, there was no overall producer inflation, but on a core basis (excluding gas and food), prices were higher by 0.3% on a month-to-month basis. For consumer, prices were up 0.3% in March on a month-to-month basis, and up 0.2% on a core basis. As is stands right now, the consumer inflation 'rate' is 2.65%. The annualized producer inflation rate is 5.6%.

The former is tolerable, though the latter - producer inflation - remains naggingly high.

The only other big numbers last week were initial and continuing claims. New claims popped from 355K to 380K, which is the highest reading in a few weeks. Ongoing claims, which are a week behind new claims, fell a tad, from 3.35 million to 3.251 million. That dip extends what's become a pretty long decline in continuing jobless claims.

Economic Calendar

The coming week is going to be a lot more exciting. We don't know if that's going to be a good thing or a bad thing (or perhaps both), but it's sure to be exciting.

Things kick off with a bang on Monday, with retail sales. The numbers should be dialed down a bit from February's big increase, with retail numbers supposed to be up 0.3% overall, and up 0.6% excluding auto sales.

On Tuesday we'll get housing starts and building permit numbers. Both should be even; right around 700K for each. That's better than year-ago numbers, but both have been stagnant for a while.

Also on Tuesday we'll be hearing about March's capacity utilization and industrial production.... two of the biggest bull/bear market (long-term) indications. Capacity usage should be up from 78.4% to 78.5%, while production is expected to have increased by 0.2%. The numbers seem small, but when you're talking about an entire economy, those are pretty meaningful improvement. As long as both sustain their current uptrends, the market should remain in a bigger-picture bull market. That will NOT, however, stave off a short-term correction like the one that seems to be developing now.

We'll round out the housing picture with Thursday's existing home sales. The figure is expected to rise from an annualized figure of 4.59 million to 4.62 million, right around where the figure seems to have stagnated.

Stock Markets

If there's one thing we've learned from stocks over the past several weeks, it's to expect the unexpected. The market (DIA) (IWM) (QQQ) shocked most traders by rallying 17% over the span of seventeen weeks, and just when the market fooled investors into a false sense of perpetual bullishness; it shocked them again by doling out a very disruptive pullback. Point being, let's assume nothing, and know that we're only playing the odds now.

On that note, those odds favor more downside.

The big bearish clue is the fact that the S&P 500 Index (SPX) (SPY) has closed under the 50-day moving average line (purple) as of Friday. The index actually fell to a close under that line on Tuesday, but quickly recovered, hinting the selloff was a flash-in-the-pan affair. To see it happen a second time in the same week though? Yeah, the bears aren't playing around here. It's the first time stocks have closed under the 50-day average on a weekly basis since November. The only difference now is, there are a lot of profits to protect in the shadow of that 17% advance.

Mirroring the S&P 500's bearish change in direction is the VIX's newly-developed uptrend.

Like the SPX, the CBOE Volatility Index (VIX) (VXX) (VXZ) has crossed its 50-day moving average line in a meaningful way for the first time in a long time. And, it's part of a major reversal effort. Take a look.

S&P 500 & VIX - Daily

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While the paradigm shift is pretty clear on the daily chart, for perspective, take a look at the weekly chart. On it we can see just how dramatic the last couple of weeks have been, particularly for the VIX. More than that though, we can see why there's been so much upward pressure on the VIX. There's an organic floor at 14.4 for the VIX, and of this bounce off of it is anything like the last several, the VIX should continue to rise - while the market falls - for quite some time.

S&P 500 & VIX - Weekly

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So what's a likely landing point for the S&P 500 now that the bears have the ball rolling? Realistically, the S&P 500's lower 20-week Bollinger band (gray) currently at 1212 has historically been the recovery point once the overall market suffers a setback of this magnitude. However, bear in mind that the lower band line is also pointed nearly straight up, and could be much higher than 1212 by the time the market gets a chance to retest it.

Or, here's a slightly different take on the potential size of the pullback - the average bull market correction is on the order of 9%. If the SPX is to dole out a dip [from the recent peak] on par with historical ones, that would push it down to 1294 or so, which would be right in between the 100-day and 200-day moving average lines (blue and green, respectively). Those two moving averages frame the typical pullback 'range'.

The lower 20-week Bollinger band could be in between those two moving average lines by the time the bears pull the S&P 500 to that area, further bolstering the case that the floor's going to be somewhere around there.

But hey, like we said, the market's been throwing curve balls for a while.

No matter which side of the fence you're on or how you're interpreting the odds indicated by the shape of the current charts, know this - one day does not make or break a trend.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.