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Weekly Market Outlook

|Includes:AA, MDZ, QQQ, SPDR S&P 500 Trust ETF (SPY), SPY, SVU, VXX, VXZ
Stock indices put up another gainful week, up anywhere from 1.8% to 2.7% thanks to a heroic Monday. Of course, more than half the gains came on Monday, meaning the rest of the week’s rally was at a slowed pace…. and made on tepid volume, no less. So, while the undertow is still a bullish, the buyers are hesitant. Perhaps they’re aware of how overbought stocks are, and how overdue we (still) are for at east a modest correction.

We’ll look at the premise in detail below. First up though, is last week’s and this week’s economic announcements.

Economic Calendar

There was a lot going on last week – most of it pretty important, and most of it discouraging. Home sales, construction spending, and consumer credit were all down, underscoring a still-struggling real estate arena. No part of the employment scenario was all the impressive either; unemployment was flat, claims were down slightly, and nonfarm payrolls were down (and more than expected).

Overall, last week’s data was mediocre at best, and hardly inspirational.

As for this week, look for retail sales data on Thursday, and inflation data on Friday. Until last month, inflation has been fairly tame. With the flood of dollars the Fed’s injected into the monetary system though - coupled with low interest rates – November’s inflation rate of 1.84% (the first positive number since February) could be an omen that inflation is finally gearing up.

Also capacity utilization and industrial production numbers will be released on Friday. Both could push the market around that day (though they shouldn’t), and both will have a longer-term impact on the market (which they should).

For what it’s worth, here’s a chart of the S&P 500 versus inflation versus capacity utilization:

S&P 500 – Monthly (with inflation and capacity utilization)

NASDAQ Composite

Let’s switch gears this week and take a look at the NASDAQ. Or more specifically, let’s take a look at the VXN…. the NASDAQ’s volatility index. Though the trend is bullish – as we are in the bigger picture – all the indications are that the market is overextended and ripe for a dip.

The first of those clues is the RSI [relative strength index] line being in overbought territory. Not that it can’t keep rallying while overbought, but the NASDAQ does not usually do so. Take note that the index doesn’t have to give up a whole lot of ground to undo that situation.

The biggest of these clues, however, is the VXN at the bottom of the chart. As you can see, it plunged to the lower Bollinger band on Friday… an extreme degree of confidence that really wasn’t matched by a market gain. Too much confidence? Possibly. The last several times the VXN hit the lower Bollinger band (20 day), stocks paid a price over the next few days – though to various degrees.

There’s on off-chance the VXN could keep driving the lower band lower, as we saw in March, April, and May. Given the overall snapshot though, our expectation is still one of a moderate dip to burn off the overbought pressure. That selling could end when the NASDAQ’s rising support line (currently at 2248) is finally retested. More likely though, it will end when the VXN’s upper Bollinger band is reached. It’s currently at 23.3, and falling.

Let’s revisit this chart when one of those two things happens, though as of right now we’re still using dips as entry points.


Earnings Calendar

The thick of earnings season won’t hit until February, but here are some announcements you need to know about for the coming week.

01/11 – ALCOA Inc. (NYSE:AA)

01/12 – Supervalu Inc. (NYSE:SVU)

01/14 – MDS Inc. (MDZ)

Sector Results

The basic materials stocks led the way last week, with a 6.5% gain. Energy was right behind with a 4.8% rally. At the bottom of the barrel you’ll find telecom with a 4.0% loss (most of which was taken on Wednesday), and utilities, with a 1.0% dip. None of them are new trends, except for the renewed strength in energy stocks… a trend you may well want to pay attention to now, as it’s a group with an enormous amount of rebound potential.

Trade Well,
Price Headley

Disclosure: No positions.