It wasn’t as bad as the week before, but it was still pretty nasty. The major indices fell anywhere from 1.0% (the Dow) to 2.6% (the NASDAQ) last week, in a move that’s become much more than just a little volatility. Too many of the key support levels are now broken, and more corrective action is expected now that the bears have the ball rolling.
And, there’s plenty of economic data/fodder to spur that action. As busy as last week was on the economic mews front, the coming week will be even busier. Let’s start there before proceeding to the market’s analysis.
The best GDP growth since 2003 (+5.7%), and stocks still can’t get anything going. Actually, it shouldn’t be a real surprise – the data nugget is looking at information that is not only 1 to 4 months old, it’s also figured to be a little artificially-stimulated. The longevity of that strength is still in question. Sentiment, in the form of the Univ. of Michigan Sentiment Index or Consumer Confidence, was up for the month, but clearly wasn’t a bullish catalyst either.
Perhaps it was the shortfall home sales (new and existing) or the lower home prices, or rising unemployment claims (new and existing).
As for the coming week, we kick things off with a couple of big ones…. personal income and personal spending. We’ll end things with the unemployment rate, and we’ll squeeze pending homes sales in between the two. Coming in short for any or all of the estimates could fuel the bearish fire.
S&P 500 Index:
In a normal environment it’s easiest to make predictions about the market based on what it’s doing. This isn’t a normal environment though; it may be more effective to explain the bearish outlook based on what the market’s not doing. So…
Not finding support at the lower Bollinger band – All the short-term dips since September were all stopped and reversed thanks to support found at the lower 20-day Bollinger band (2 SDs), which are the green lines on our chart. Now, however, the lower Bollinger band and the S&P 500 are easily walking hand-in-hand to multi-week lows.
The VIX is not at an extreme high suggestive of a peak in fear – Most significant bottoms end with a spike in the CBOE Volatility Index, or VIX. We saw this fear a week ago when the VIX reached a high of 28.01. As the SPX has reached new multi-week lows though, the VIX hasn’t. Despite the market’s tumble, fear isn’t yet pressing into unsustainable (i.e. reversal) levels.
The 1086 level did not act as support – We saw the S&P 500 held up at the 1086 level in November and December, and for a while late last week. That floor cracked this week though.
The rising support line (red) also didn’t hold the SPX up. This is the line that has traced all the major lows gong back to August, and consists of three nodes. The fourth node should have been made last week, but the S&P 500 just fell under it.
As we mentioned a few weeks ago, the more likely downside target for the SPX remains around 1025/1030, which was approximate support for both of October’s lows. That would also represent a much more complete ‘correction’ level for the overall market.
Normally we’d add the sector results here. Not that there weren’t any industries to make gains last week, most lost – badly – in the market’s greater bearish tide. So, to highlight winners and losers would be a tad pointless. So, to make better use of the space and time, we’ll revisit a chart we first examined a few weeks ago (December 20th)… the U.S. Dollar Index.
At the time, the U.S. Dollar Index (UDX) had just moved sharply higher, breaking a long-standing downtrend, and closing at 77.69 for that week. Our basis expectation was the obvious one – bullish based on the breakout. Since then, the sawbuck’s index has reached 78.90 (which is quite a big move, for a currency).
And how much more upside can the greenback muster? Using Fibonacci lines as our guidelines (Fib lines are particularly adept when it comes to spotting Forex reversals), the U.S. Dollar Index should reasonably be able to reach 79.81 before a major headwind is hit. That area was also a little turbulence last August.
Don’t dismiss the possibility that the index could break through 79.81 – that level is simply a fork in the road. You just need to be aware that a major turn could be happening around there... a turn that is less likely to happen in the one point between here and there.
Disclosure: No positions.