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Yes, Friday was rough. Both the S&P 500 and the Nasdaq Composite slipped back under their 20-day moving averages which they fought so hard to hurdle going all the way back to two weeks ago. The sheer scope of Friday’s selloff is also alarming.

Don’t panic just yet, though. Not only was Friday an options-expiration day that induces a fair amount of trading, it was also a quarterly expiration day. There was a whole lot of moving and shaking being artificially stoked. It just so happened to lean in a bearish direction.

On the other hand, even artificially-stoked motion can jolt the market out of one trend and into another. We’ll look at the matter in some detail in a moment. Let’s first run through last week’s major economic announcements and preview the reports that are coming this week.

Economic Data Analysis

Last week’s big economic news was a look at last month’s inflation. Not only do we still have plenty of it, we now have a little more of it. Although the upticks were modest, they’re also upticks at a time when traders were hoping inflation’s cooling would carry on. In fact, last month’s were the second consecutive month year-over-year prices increased.

Inflation Rate Charts (Annualized)

(Click on image to enlarge)

Source: Bureau of Labor Statistics, TradeStation

The Federal Reserve was reportedly mulling backing off on its plans for more rate hikes to end the year. Now, the Fed’s governors may not have that option.

Given that prices are ticking higher again, it can’t come as a real surprise that retail sales growth also accelerated from July’s pace. The question is, does this increase in spending merely stem from higher prices? Or, are consumers also feeling confident enough -- and flush enough -- to actually buy more stuff? It could be a bit of both.

Retail Sales Charts

(Click on image to enlarge)

Source: Census Bureau, TradeStation

Finally, on Friday, we heard August’s capacity utilization and industrial production numbers. There’s encouragement here. Both edged higher, and while neither of them are soaring yet, productivity is clearly picking up.

Capacity Utilization and Industrial Productivity Charts

(Click on image to enlarge)

Source: Bureau of Labor Statistics, TradeStation

This is no small matter. Industrial output and the utilization of capacity correlates closely with corporate earnings and the market’s long-term tide. To see some progress here bodes well. Still, it won’t necessarily be enough to stave off short-term weakness.

Everything else is on the grid.

Economic Calendar

(Click on image to enlarge)

Source: Briefing.com

This week’s going to be busy, too.

On Tuesday, we’ll hear last month’s housing starts and building permits figures. Economists are looking for roughly more of the same, which is a bit of a problem. These numbers are settling at subpar levels since early this year, suggesting demand for new homes -- one of the real estate market’s bright spots of late -- isn’t so rock-solid anymore.

Housing Starts and Building Permits Charts

(Click on image to enlarge)

Source: Census Bureau, TradeStation

On Thursday, look for last month’s sales of existing homes; new home sales for August won’t be out until next week. As is the case with starts and permits, forecasters aren’t looking for any real change in sales of existing homes -- which are low (not that new home sales are all that impressive, either). This hasn’t had an adverse impact on prices yet. But, if things stay like this, that’s only a matter of time.

New, Existing Home Sales Charts

(Click on image to enlarge)

Source: Census Bureau, National Association of Realtors, TradeStation

Perhaps the most telling detail of this week’s look at existing home sales will be the amount of homes for sale. It’s edging a little higher now, but it has been at very low levels for some time, keeping prices propped up.

The most important news due this week, however, is Tuesday’s decision regarding the Fed Funds Rate. As of the most recent look the odds suggest the FOMC won’t change it. But, it’ll be interesting to see if the rhetoric -- or “dot plot” -- changes any.

Stock Market Index Analysis

This week’s analysis starts out with no other introduction other than to say take a look at the daily chart of the S&P 500 below. It speaks for itself.

S&P 500 Daily Chart, with VIX and Volume

(Click on image to enlarge)

Source: TradeNavigator

That’s not errant data or a tick error. The index fell 1.22% on Friday, unwinding a valiant fight to get back above its 20-day (blue) and 50-day (purple) moving average lines. It’s a scary sight to see, as these jolts often start a new trend.

There’s an important footnote to this selloff, though. That is, Friday was not only an ordinary monthly options expiration day, but a quarterly options expiration day as well. The looming end to these contracts forces traders to make decisions, which often leads to a surge in buying and/or selling. In this case it was a lot of selling. We saw the same thing from the Nasdaq Composite, as you can see below.

NASDAQ Composite Daily Chart, with VXN

(Click on image to enlarge)

Source: TradeNavigator

So now what? Most of the time, expiration day action is short-lived, with stocks resuming their bigger-picture trend the following Monday. This one may pan out the same, with the market starting to move higher again by the time you’re reading this.

Other times, however, these stumbles can open the floodgates that has been closed. If there’s been pent-up selling just waiting to be unleashed, this move under the 50-day moving average lines could be the start of something. We’re also at the right time of year for weakness. Not only is September (into early October) usually weak, the autumn of the third year of a presidential term tends to lean bearishly through November, even in bull markets.

S&P 500 Average Performance, Four-Year Presidential Term

(Click on image to enlarge)

Source: TradeNavigator

But how will we know if this year’s going to follow the market’s usual path? It actually comes down to an index and chart we don’t talk about too often: the Dow Jones Industrial Average. Its rising support line in place since last October (light blue, dashed) is well-defined.

It’s also about to be tested in a big way – one or two more bad days could do the trick. That technical support is the market’s last best hope, though. The other two key indices are also starting to break down.

Dow Jones Industrial Average Daily Chart

(Click on image to enlarge)

Source: TradeNavigator

The bulls may well push back early this week, providing a brief respite from the selling. Don’t be too quick to jump to conclusions based on that move, though. It might take a few days for the sellers to regroup and then make another run on their current floors.

In other words, it might be smartest to keep your powder dry early this week, and use the time to gauge how the market’s going to react to Friday’s artificial selling. It could end up turning into very real selling real soon. But, we just don’t know enough right now to say for sure.

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