Weekly Market Outlook – This Is Where Traders Have To Commit, Or Flinch

The bears had their opportunity to quell the rally - or at least shut it down for a while. When push came to shove as the three-day weekend approached though, the bulls wanted it more. Granted, the removal of the risk of another government shutdown gave the market the nudge it needed. But, even without that nudge it doesn't look like traders have any valuation concerns just yet.

There's still a chance for a small stumble here... a stumble that in some ways would actually be beneficial. The rally needs a good 'reset' so it can fully renew. It wouldn't even take much to do that, which we'll explain in some detail below.

Before we get to any of that analysis though, let's run-down last week's economic announcements and preview this week's reports. We got a curious, potentially misleading data nugget last week that we want to explore so we can ignore.

Economic Data Analysis

It's increasingly clear the Federal Reserve was right to not continue with rate hikes as aggressively as it did in 2018. Inflation is tame to the point of being non-existent. Although the risk of deflation is well down the road and likely to be avoided, the trend as of last month has to leave some wondering if something is quietly wrong. As of the latest look, the annualized consumer inflation rate stands at 1.5%, and has fallen for three straight months (and fallen six of the past seven).

Consumer, Producer Inflation Charts

Source: Thomson Reuters

Last week's biggest news was the December retail sales report, though it was also the most suspect. Consumer spending in stores fell 1.2% from November's levels, which is one of the biggest month to month drops in a decade.

It's also a drop, however, that should be taken with a grain of salt.

The formula is a bit complicated; the simple explanation is, the Census Bureau adjusts the monthly figure to account for calendar-based volatility like Christmas-related spending. Though on an adjusted basis the total amount of spending fell, on a raw, unadjusted basis, it was actually up.

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