Market Outlook Shows No Panic Spike ... Yet

by: Price Headley, CFA

Weekly Market Outlook

It was the first losing week in the last six, and the biggest losing week since mid-August ... and a selloff that was long overdue. Between the fact that stocks are still overbought and the fact that the bears have gathered some momentum though, last week may have been just the beginning of something more dire.

On the other hand, stocks are not technically in dire straits yet, and could well manage to stave off an implosion if the bulls play their cards right.

We'll look at the ins and outs of the market below, right after a bigger-picture look at the economy.

Economic Calendar

While it was a light week last week in terms of economic data, it was an important one all the same.

The biggies were initial and ongoing unemployment claims. Both were either at or on the verge of new multi-year lows, extending a broad trend lower on both fronts. While still coming in at high levels, there is real progress on the jobs front.

The only other data of consequence was the Michigan Sentiment Index, coming up from 67.7 to 69.3. It's a reversal of some of the declining readings we've seen in the last couple of months, and renews the longer-term uptrend.

Economic Calendar Table

(Click to enlarge)

The coming week will be much busier, kicking off with retail sales on Monday. With or without autos, we should see minor growth. On Tuesday we'll hear about producer price inflation, with consumer inflation being unveiled on Wednesday. Inflation is expected to be minimal for both measures, especially in terms of core inflation.

Also on Wednesday we'll hear two major - and relevant - indications of manufacturing activity ... industrial production and capacity utilization. Again, both are forecasted to show the slightest of improvements. It should be noted that both the capacity utilization level as well as the industrial productivity index (as opposed to the percent change that's discussed by the media) are both trending bullishly for the long-term market. And, given how strong the correlation is, true buy-and-holders should remain unworried.

Later in the week we'll get a dose of real estate data ... housing starts and building permits. The former should fall in a hair lower, while the latter is anticipated to rise from 539K to 565K.

Initial claims as well as continuing claims should roll on flat to a hair higher on Thursday.

S&P 500 Vs. Capacity Utilization and Industrial Production Index Monthly Chart

(Click to enlarge)

S&P 500

The S&P 500 took a nasty 26.64 point, 2.17% tumble last week. It was the first losing week in the last six, the second loser in the last eleven, and possibly the first in a string of a few more.

Take a look at the following chart. The upper Bollinger band (purple) has once again capped the rally, this time at 1230. Only this time, the SPX may not be able to snap back as quickly it has when it was previously attacked. That's the risk you run of putting up a 16.7% rally in ten weeks.

One oddity working against the market.... investors aren't freaking out. If they were, you could almost make the case for a mild capitulation or a fear spike signaling a short-term bottom. That's not what we've got though. With the VIX (NYSEARCA:VXX) (NYSEARCA:VXZ) still under the make/break line at 21.50 - and not rising all that impressively - investors don't seem to care that the market got bombed last week. As such, it's hard to argue stocks have hit their near-term low.

Ideally, the VIX will brush its upper Bollinger band at 24.10 for the market to hit a nice, trade-worthy bottom. That, or we'll at least get a decisive reversal bar from the VIX. Either way, we've still not made what should be the capitulation.

All that being said, the market's still not even in breakdown-mode yet. The 20-day moving average line (blue) at 1196 stopped the selloff on Friday, as it has been doing since August. Until it yields, talk of finding a bottom is a little moot.

S&P 500 vs VIX Daily Chart

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Sector Performance

It was another big week for energy ... the only group to come out a winner in fact (and that includes gold). It's a strength largely based on the continued rise in oil prices, which tapered off later in the week, and is in a bigger-picture uptrend. Given how beaten up these stocks were, not to mention how much room the U.S. dollar has to recover, that bullishness may well be a counter-trend to bet on.

As for the losers, the financial stocks once again found themselves on the bottom rung after taking the number one spot - obviously temporarily - last week. The actual weakness of the group is still a question mark though. It too has been beaten badly for several weeks now, and seems to have more upside potential than downside; last week's pummeling is apt to have been overkill/overreaction.

Sector Rank Table

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Disclosure: No positions