Weekly Market Outlook – The Bulls Need to Learn a Thing or Two About Pacing

Following through on the prior week’s rebound gains, stocks logged another win last week to end the five-day stretch at (or at least near) record highs. The S&P 500 was up 1.6%, while the tech-heavy NASDAQ Composite rallied an impressive 3.2%, breaking above a key resistance level in the process. But, another technical ceiling is now in play, and the index is vulnerable to profit-taking thanks to its recent oversized gains. And that’s not the only red flag.

Then again, we also have to acknowledge the market’s gotten very good at defying the odds of late.

We’ll look at the risks to this rally in some detail below. First, let’s recap last week’s biggest economic announcements and preview what’s coming this week. Spoiler alert: The Federal Reserve says it’s happy enough with inflation’s status quo. It probably shouldn’t be so happy though.

Economic Data Analysis

The only data set from last week of any real interest was May’s inflation data… consumer and producer. Overall consumer inflation fell slightly from April’s pace, but it’s still above target at 3.3%. Core inflation (ex-food and ex-gas) also fell slightly, but again, is still rich at a rate of 3.4%. Producer inflation is more tame -- at least overall -- at 2.2%, down slightly. The nation’s factories and food companies are still suffering higher costs, however, with core PPI rolling in 3.2% higher year-over-year.

Inflation Rate Charts

Source: Bureau of Labor Statistics, TradeStation

Of course, you probably already know the Federal Reserve not only left interest rates unchanged last week. What you may now know is the language of the minutes from the decision-making meeting suggests there’s only one more rate cut likely for this year; the market’s betting on that happening in September. Although last week’s inflation data isn’t the core driver of the FOMC’s policy, clearly interest rates aren’t coming down nearly as quickly as previously expected.

Everything else is on the grid.

Economic Calendar

Source: Briefing.com

This week’s pretty well loaded -- particularly for the real estate sector. The party starts, however, with Tuesday’s retail sales figures for May. Economists are looking for a little bit of acceleration from April’s lethargic progress. As the chart below makes clear though, a little acceleration isn’t going to do much. Retail spending growth’s been pretty anemic for a while now.

Retail Sales Charts

Source: Census Bureau, TradeStation

Also on Tuesday we’ll hear last month’s capacity utilization and industrial production data from the Fed. The outlook is for a modest improvement on April’s so-so numbers, but as was the case with retail sales, tepid improvement isn’t going to cut it. The economy is slowly fizzling out here, according to this data.

Industrial Production and Capacity Utilization Charts

Source: Federal Reserve, TradeStation

A wave of real estate reports also starts on Thursday, with May’s housing starts and building permits (following Wednesday’s update of homebuilder confidence). Like so many other measures, these aren’t great… particularly permits. Forecasts don’t suggest things are going to perk up much this time around.

Housing Starts, Building Permits Charts

Source: Federal Reserve, TradeStation

Finally, look for May’s sales of existing homes on Friday. For a short while it looked like they might snap out of last year’s funk. But -- no real surprise here -- they’re falling again thanks to crazy-high interest rates and crazier-high home prices. They probably fell a bit more in May.

New, Existing Home Sales Charts

Source: National Assn. of Realtors, Census Bureau, TradeStation

Note that new-home sales numbers will be posted next week. It’s doubtful we’ll see anything different there. Note that sales of new homes are in more of a decline than sales of existing homes are.

Stock Market Index Analysis

We kick things off this week with a look at the weekly chart of the S&P 500, not because it’s dropping any secret hints, but because it offers us the most perspective. And it’s important right now to mentally frame the situation before making any kind of buy/sell call. Take a look. Thanks to last week’s 1.6% advance, the index is now up 9.4% from April’s low. That’s enough of a prolonged gain to say bullish momentum is well developed. In fact, the MACD lines just flipped back into bullish mode.

S&P 500 Weekly Chart, with VIX and MACD

Source: TradeNavigator

As the weekly chart also shows us though, the S&P 500 is knocking on the door of a technical ceiling (red, dashed) that connects all the major highs going back to early last year.

The weekly chart of the NASDAQ Composite shows us the exact same thing. That is, thanks to last week’s big jump, this index is also testing a technical resistance line (red, dashed) that connects all the major peaks since early-2023/ If the bears were going to make a stand, this would be an ideal place to do it.

NASDAQ Composite Weekly Chart, with MACD and Volume

Source: TradeNavigator

Regardless, as was the case with the S&P 500, the NASDAQ Composite’s MACD lines just formed a bullish divergence. The momentum is bullish, so we are too.

The daily chart of the NASDAQ Composite underscores this bullishness. That’s because it poked above a slightly different resistance level (purple, dashed) last week. You’ll also see that while still below its recent average, the amount of volume we’re seeing on the market’s “up” days is finally starting to rise just a bit.

NASDAQ Composite Daily Chart, with VXN and Volume

Source: TradeNavigator

There are still red flags here, not the least of which is the sheer scope and speed of the recent gains, and the subsequent risk of profit-taking now. Both the NASDAQ’s and the S&P 500’s volatility indexes are at unusually low levels as well (as the daily chart of the S&P 500 below shows us). This doesn’t guarantee a pullback is in the cards anytime soon, but it does raise the odds of it -- it certainly makes it less-easy for the market to continue climbing.

S&P 500 Daily Chart, with VIX and Volume

Source: TradeNavigator

And of course, both indexes left behind chart gaps with Wednesday’s strong open. Although they shouldn’t matter, most traders balk when they see such gaps in the rearview mirror.

All the same, the trend here is bullish, so we should be too. It’s actually going to take quite a bit of selling from here to do enough technical damage to stocks to get the bearish ball rolling in a bigger-picture way. Just don’t overreact to only a little bit of weakness. In other words, there’s room for a little selling here. We won’t panic until the S&P 500 starts trading under its 100-day moving average line (gray) currently at 5,143. The NASDAQ’s is at 16,206.