Weekly Market Outlook – Rough Week, But Still Not Beyond Recovery

We knew a week ago that stocks were playing with fire. Last week, they got burned. The S&P 500 took another -- and bigger – tumble, while the NASDAQ Composite took its first weekly loss since early September.

And yet, it’s not like the market is in a freefall. It’s close, but there’s a still a way to sidestep a more serious correction. The thing is, maybe that’s not in the stock market’s best interest right now. The more advantageous move may well be letting a decent-sized selloff take shape so we can end the year and then begin the new one on a bullish foot.

We’ll look at how and why that would work in a moment. Let’s first look at last week’s economic news and then preview what’s in the lineup for this week.  

Economic Data Analysis

Last week’s big announcement was of course October’s jobs report, posted on Friday. There was plenty worth noting released before that, however.

Take Tuesday’s updates on home prices as an example. The Case-Shiller Index for August was up 5.2% year over year, although it still fell for a second month in a row. The FHFA Home Price Index, conversely, slightly accelerated in August.

Case-Shiller, FHFA Home Price Charts

Source: Standard & Poor’s, FHFA, TradeStation

There’s actually a reasonable explanation for these opposing moves. That is, higher-end home sales may be fading, while less-expensive homes are seeing price-supporting demand… if only because existing homeowners are staying put rather than selling. Just remember that just because homes are being prices when sold doesn’t mean a bunch of homes are actually selling.

Also on Tuesday we heard October’s consumer confidence measure from the Conference Board. It was up quite a bit, as was the third and final print of the University of Michigan sentiment index for the same month. It’s surprising, really. It’s also too soon to say confidence is booming. It’s certainly not in freefall though.

Consumer Sentiment Charts

Source: University of Michigan, Conference Board, TradeStation

You also likely know by now that the first estimate for Q3’s GDP growth rolled in at 2.8%, falling short of the expected 3.1% (and slowing from Q2’s 3.0%).

On Thursday we heard September’s consumer spending and personal income report… data that the Fed considers heavily when making interest rate decisions. As was expected, incomes are keeping up with spending increases -- no more, and no less. More to the point, these increases are once again strong enough to keep the Federal Reserve on track for another rate cut when scheduled to make that decision next week.

And bolstering the likelihood of at least a quarter-point cut is of course October’s jobs report. We knew payroll growth would fall, but at only 12,000 new jobs the number fell miserably short of the expected increase of 110,000. This wasn’t bad enough to budge the unemployment rate from its current reading at 4.1%, but only because so many people are currently out of the job market because they’ve been displaced by a pair of destructive hurricanes.

Unemployment Rate, Payroll Growth Charts

Source: Bureau of Labor Statistics, TradeStation

Everything else is on the grid.

Economic Calendar

Source: Briefing.com

There’s not a whole lot scheduled for this week, but we are getting a couple of important updates. Chief among them is of course Thursday’s aforementioned decision from the FOMC. As of the latest look the Fed is pricing in a 99% chance of a quarter-point cut.

The other report worth watching this week is actually coming on Tuesday. That’s October’s services index report from the Institute of Supply Management. It’s expected to cool just a bit from September’s level, mirroring last week’s comparable contraction from the manufacturing index. Unlike the manufacturing measure, however, the services score is still at least still above the make-or-break 50 mark.

ISM Manufacturing, Services Index Charts

Source: Institute of Supply Management, TradeStation

It’s now impossible to deny that these two distinct data sets are moving in opposite directions. Not terribly surprising. The U.S. remains a mostly-service-oriented economy.

Stock Market Index Analysis

The daily chart of the S&P 500 below says it all. For a short while the index found support at its 20-day moving average line (blue). It failed on Thursday. Although the 50-day line (purple) stepped up as a technical floor, the damage was still done. Last week, the S&P 500 lost a little more than 1.3% of its value… the second losing week in a row, and the worst week since early September.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeNavigator

The test of the 50-day moving average line wasn’t the only way in which the index was pushed to the breaking point without actually passing it. Notice the volatility index -- or VIX -- at the bottom of the daily chart as well. It pressed the resistance line at 23.2 (light gray, dashed), but didn’t actually move above it. The bulls may have drawn a psychological line in the sand there.

Here’s the weekly chart of the S&P 500 for a little more perspective. Although not super-well-defined, you can see from this vantage point that last week’s lull is largely a return of a test of the upper boundary of a long-established bullish trading range. Notice there’s plenty of room for the index to keep falling before it reaches the lower end of this rising trading range… more or less where the 200-day moving average line (green) is (currently at 5,385).

S&P 500 Weekly Chart, with VIX and MACD

Source: TradeNavigator

Here’s the daily chart of the NASDAQ Composite, which is suspiciously similar to the S&P 500’s by virtue of its volatility index -- the VXN -- testing but not clearing technical resistance at 25.3 (yellow, dashed). Notice the composite also bumped into its own technical ceiling that connects all of its key highs since late July (green, dashed).

NASDAQ Composite Daily Chart, with VXN and Volume

Source: TradeNavigator

Now take a step back and look at the weekly chart of the NASDAQ Composite. Like its counterpart, there’s technical support immediately below. There’s also room to fall a bit more before even starting to test the ultimate low edge of the rising trading channel that’s been in place since early-2023.

NASDAQ Composite Weekly Chart, with VIX and MACD

Source: TradeNavigator

This is tricky. There’s no denying the stock market’s still due for a decent-sized correction. But, what we have thus far is anything but convincing that such a pullback is underway. This is what the beginning of such a move would look like. But, it would take much more than this to push either index past the brink to get such a move going so firmly that it can’t be stopped. Until then, we must respect the fact that the bulls are defending their technical turf.

In other words, don’t panic just yet. We’ll only need to start sweating if and when the indices actually move past the aforementioned lines. And even then, there’s the bottom edge of the long-standing trading ranges waiting to serve as backup floors.