From Price Headley,

The market mustered its third weekly win in a row, reaching another 52-week high in the process. But, Thursday’s sizeable intraday setback raises concerns. It didn’t do enough damage to turn a winning week into a loser (obviously). The shape and scope of that day’s reversal bar, however, is a hint that this rally may be ready to evolve into a wave of profit-taking. Traders just decided to not get that ball rolling on Friday. An agreeable inflation report prompted the market to see the proverbial glass as half-full rather than half-empty.

We’ll take a detailed look at how stocks pushed through that stumble to log another winning week in a moment. Let’s first recap last week’s biggest economic announcements and preview what’s coming this week.

Spoiler alert: Friday’s jobs report for July has the potential to move the market.

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Economic Data Analysis

The week started with a key update on the health of the real estate market, in the form of pricing updates. As was expected, both the Case-Shiller and the FHFA Home Price Indexes continued to edge their way higher though May.

Home Price Charts

Source: Standard & Poor’s, FHFA, TradeStation

Just bear in mind that the price indexes only consider the prices of transaction completed. They don’t factor in the number of delas made or not made. To that end….

We learned last week that June’s sales of existing homes are clearly in decline following a brief surge in January. Now new home sales are on the defensive. Not only was May’s first count of 763,000 dialed back to a pace of 715,000, June’s figure of 697,000 is measurably below estimates of 722,000. Notice last month’s new home sales also ended a multi-month uptrend.

New, Existing Home Sales Charts

Source: Census Bureau, National Association of Realtors TradeStation

It’s not fatal just yet; homebuilders are still feeling pretty good about the market. Given the disastrous sales of existing homes though, June’s lull in new home sales is worth watching as a potential beginning of a more serious slide.

Last but not least, last week gave us looks at how consumers are feeling. The Conference Board’s consumer confidence figure jumped to a multi-month high of 117.0, far exceeding expectations. The third and final look at the University of Michigan’s Sentiment Index also left it at a multi-month high in June.

Consumer Sentiment Charts

Source: Conference Board, University of Michigan, TradeStation

It’s not entirely clear what’s fueling this optimism other than cooling inflation. Given the unrelenting bullishness from stocks though, there’s no reason to doubt people are feeling this confident. That’s got to be a fragile optimism, however.

Everything else is on the grid.

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Economic Calendar


This week won’t be quite as busy, but there are a couple of biggies in the lineup.
The first of these data sets is last month’s manufacturing and services index from the Institute of Supply Management. Both measures have been in decline since late-2021, and that’s not likely to be meaningfully reversed this time around.

ISM Services and Manufacturing Index Charts

Source: Institute of Supply Management, TradeStation

The big Kahuna, however, is the jobs report due on Friday. Payroll growth is apt to come in relatively weak again, but that’s largely because we’re near maximum potential employment. That’s also why the current unemployment late isn’t expected to move below its current rate of 3.6%.

Payroll Growth and Unemployment Rate Charts

Source: Bureau of Labor Statistics, TradeStation

Stock Market Index Analysis

We start this week’s analysis with a zoomed-in look at the daily chart of the S&P 500. Our primary interest is Thursday’s bar, when the bullish start to the session was so dramatically turned around to log the worst day in quite some time. The scope of the loss isn’t horrifying. But, the fact that the market so easily and readily turned tail on worries that the Fed may need to remain more hawkish than anticipated… worry that was somewhat unwound on Friday by another hint of cooling inflation. Again though, Thursday’s bar is a concern simply because it took shape so easily on not-exactly-surprising news. It says the bulls may be ready to take some profits.

S&P 500 Daily Chart, with VIX

Source: TradeNavigator

And the NASDAQ Composite is waving the same red flag. Although Thursday’s big intraday reversal didn’t drag the index below its 20-day moving average line (blue) at 14,005, it was still a sizeable stumble. One or two more bad days could still easily snap what’s already a waning rally.

NASDAQ Composite Daily Chart, with VXN

Source: TradeNavigator

Zooming out to the weekly charts puts Thursday’s pullback in perspective — meaning it doesn’t mean much. The uptrend is still clearly intact. Nevertheless, the S&P 500’s weekly chart looks and feels overextended. We’re now up more than 20% just since March’s low, and on the order of 28% higher than October’s bear market low. The volatility index (VIX) also remains at oddly low levels, leaving stocks ripe for the aforementioned profit-taking.

S&P 500 Weekly Chart, with VIX

Source: TradeNavigator

The same thing goes for the NASDAQ Composite. Also notice that the NASDAQ remains above the 61.8% Fibonacci retracement line it hurdled three weeks back.

NASDAQ Composite Weekly Chart, with VXN

Source: TradeNavigator

So what do we do here? First and foremost, you follow the bigger-picture momentum. The trend is still bullish. You should be too.

That being said, it would be short-sighted to not prepare for a corrective move here. We’re certainly overdue. But, until both the S&P 500 and the NASDAQ Composite both break under their respective 20-day moving average lines, the uptrend is still intact. Thursday’s bearish flash is just a hint that the bullish effort may be losing steam, with traders increasingly doubting more upside is in store. They’re not doubting it enough to actually dump their stocks in earnest yet, though.

Either way, there are plenty of technical floors not too far beneath the 20-day moving average lines to stop a selloff before it does too much damage. Most traders will also be looking to start buying again on any decent dip, limiting how much correction is actually in the cards… if one’s in the cards at all. As it stands right now, we don’t know that there is.

Price Headley,

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