Weekly Market Outlook - July 18, 2016

The market (the S&P 500 (SPY) anyway) rekindled the rally early last week, finally pushing through the resistance of its May 2015 peak at 2135 to move to a high of 2169. But, it didn't end the week with the same zeal it started it with. In fact, on Friday the index lost a little ground, and logged the first lower low in almost two weeks.

A sign that the weight of the 8% gain over the past three weeks and the 16% gain since February has become too much? Possibly. Yet, that doesn't inherently mean the market has to pull back here and now... though it would be oddly impressive if stocks were to advance any deeper quickly, with an already-frothy valuation.

We'll discuss the recent strong market momentum below, after dissecting last week's and this week's economic data.

Economic Data

Last week was plenty busy on the economic news front, though there were only three biggies worth a closer look…. Inflation, industrial activity, and retail sales. All but the producer price inflation data was unveiled on Friday. In no certain order…

Inflation is mixed, but even with last month’s broad rises, it’s contained. The Fed’s only worry needs to be that the current trend is going to be unstoppable when the time comes (or stoppable only with huge Fed intervention).

As of the latest look, the overall consumer inflation rate stands at 1.0%. It’s 2.3% when taking out food and energy, and that’s rising fast. It’s tolerable though. And, producer price inflation is negative overall -- on an annualized basis -- and only up 0.9% when taking food and energy out of the equation.

Inflation Chart

Source: Thomson Reuters

As for manufacturing productivity, it was marginally better in June. Capacity utilization edged a little higher, to 75.4, while the manufacturing productivity index moved up to 103.9. Both rolled in better than expected to. However, neither are back into firm uptrends yet. It will take a couple more progressive months before the data is constructive again.

Capacity Utilization and Industrial Productivity Chart

Source: Thomson Reuters

Retail sales were surprisingly strong last month too, exceeding expectations with or without automobiles factored in. Last month, overall retail spending was up 3.0% versus spending from June of 2015. That marks the fifth month in a row retail consumption not counting food services was up on a year-over-year basis, and when factoring in food, we’re well into a multi-year streak of some degree of monthly year-over-year growth.

Retail Sales Chart

Source: Thomson Reuters

In other words, consumers are doing their fair share to pull the economy along, despite little corporate or government help.

Everything else is on the grid:

Economic Calendar

Source: Briefing.com

This week won't be quite as busy, although it's going to be a huge week for real estate.

The party starts in earnest on Tuesday, with June's housing starts and building permits. Economists say both will roll in just a little higher, which would be a relatively important victory in light of the fact that both sets of data seem to be a bit stagnant now.

Housing Starts and Building Permits Chart

Source: Thomson Reuters

We'll be hearing the FHFA Housing Price Index on Thursday, for May. No outlook exists yet, but odds are good we'll see another increase, mirroring the one we've seen from the similar Case-Shiller Index.

Case-Shiller, FHFA Home Price Index Chart

Source: Thomson Reuters

Finally, also on Thursday we'll hear about last month's existing home sales. The pros say look for about the same... a pace of 5.5 million versus the prior month's pace of 5.53 million. The broad trend remains a positive one though, as it does for new-home sales. Also notice that inventories remain relatively low, perhaps suppressing the number of sales (though boosting prices).

New, Existing Home Sales and Inventory Chart

Source: Thomson Reuters

We won't get June's new home sales figure until next week.

Stock Market Index Analysis

Let's once again start with a bigger-picture look, using the S&P 500's weekly chart to gain that perspective. It's in this time-frame you can see (1) just how big the past three weeks have been, and (2) just how far the index plowed into record-high territory.

S&P 500 & VIX Weekly Chart

Chart created with TradeStation

Volume wasn't great for the move, but it wasn't horrifically low either. You'll also notice there's no technical resistance yet for the S&P 500. The next ceiling is the upper 26-week Bollinger band at 2187, but that will rise this week.

The weekly chart of the Nasdaq Composite (QQQ) looks just as bullish, if not more so. It's cleared a horizontal as well as a falling resistance line, and still has plenty of room to keep running before bumping into the next resistance level.

Nasdaq Composite & VXN Weekly Chart

Chart created with TradeStation

The only real red flag waving for both weekly chart is the fact that each volatility index -- the Nasdaq Volatility Index (VXN) and the CBOE Volatility Index (VIX) (VXX) -- is at not only an extreme low, but a proven floor. There may not be as much room for stocks to go higher as one might think. And, when zooming in to the daily chart, these red flags start to wave more emphatically.

On the daily chart of the S&P 500 you'll see the pace of higher highs and higher lows has slowed as of the latter part of last week; on Friday we logged the first lower low in nearly two weeks. The weight of the 8% gain since late June's low? Most likely.

S&P 500 & VIX Daily Chart

Chart created with TradeStation

Thing is, there's no concrete, tangible hint the S&P 500 (or the Nasdaq) is rolling over yet. The Percent R line is still above 80, and the MACD lines are still bullish. Yet, the shape of the S&P 500 here as an all-too-familiar one, and the recent mode has been a rather predictable ebb and flow. Throw in the fact that the bullish volume has been waning as the index has made its push deeper into new-high territory, and there's at least some reason to be concerned.

The fact that the S&P 500's trailing P/E is a (very) rich 21.5 has to be a factor as well.

This hot/cold ebb and flow pattern is even more evident -- and more concerning right now -- on the daily Nasdaq chart.

Nasdaq Composite & VXN Daily Chart

Chart created with TradeStation

As of the end of last week, the BigTrends TrendScore for stocks was 95.1... out of 100. That's about as bullish as it gets, from a momentum perspective. We've seen strong scores right before reversals before, however, so it would be wise to keep your eyes peeled for all the signs of trouble. The first of those signs would be a break back under the SPX 20-day moving average line. That, however, is currently at 2099, leaving room for nearly a 3% pullback before we even get a chance to find out just how well supported this rally is, or isn't.