Weekly Market Outlook – Time To Check Under This Rally’s Hood

The bulls couldn't keep the rally going for a third straight week. Having reached a little too deep into record territory, the S&P 500 lost about 0.7% of its value for the holiday-shortened week.

Still, it's hardly the beginning of a new downtrend. All the indices remain well above their key moving averages, having built up plenty of cushion from the rally born out of the late-January pullback. There's more room to keep falling as well, without snapping the uptrend. On the flipside, we're seeing much more selling volume than buying volume, even though we saw more advancers than decliners on Friday; that may have been the result of a wave of option expirations.

We'll look at that red flag in a moment. First, let's recap last week's most important economic announcements and see what's in store for the week ahead.

Economic Data Analysis

It was a busy week in terms of economic news, and for the most part, an encouraging one. In order of appearance:

We know economic activity is accelerating, but it appears we've underestimated just how quickly it would recover. The nation's capacity utilization improved from 74.9% to 75.6%, easily surpassing estimates of 74.9%; December's final tally was also revised upward. And industrial production grew 0.9%, topping expectations of a 0.6% improvement. That's a slowdown from December's 1.3% increase, though progress all the same. Both measures remain below their pre-pandemic peaks, but are recovering well.

Capacity Utilization and Industrial Productivity Charts

Source: Federal Reserve, TradeStation

In this same vein, retail sales also recovered in a big way last month following December's surprising lull. Overall retail consumption grew 5.3%, and when taking automobile purchases out of the picture, retail spending was up 5.9% year-over-year.

Retail Sales Growth Charts

Source: Census Bureau, TradeStation

Food spending -- restaurants -- remains a weak link for the obvious reasons. With the COVID-19 vaccines seemingly starting to get traction, though, this isn't a concern. The food component of the retail spending mix hasn't exactly been poor in recent months.

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