VIX Getting Scary Low - Weekly Market Outlook

Though the market may have gotten off to a slow start last week, it certainly finished strong. All told, the S&P 500 (SPX) (SPY) advanced 1.55% last week, once again hitting record highs.

As has been the case several times in recent months, however, there's something unsettling about the way the market has marched into new-high territory this time around. In fact, there are more unsettling red flags now than there have been with any of the other peaks from the market. We'll take a look at those red flags in a moment, right after a brief look at some last week's and this week's economic numbers.

Economic Calendar

While there may have been more than the normal amount of economic data last week, we're pretty much through all the economic data that was delayed by the government shutdown. And, not much of last week's data was all that important. In fact, the only data of real interest last week was Friday's industrial production and capacity utilization numbers for October. That data wasn't encouraging, however, as both slumped. Productivity fell 0.1%, and capacity utilization fell by 0.2%.

It's still too soon to say this is a problem. Though it theoretically shouldn't have impacted the economy's net activity, the government shutdown may have been a drag. Both data sets have also been trending higher for a few months, and one weak month doesn't necessarily mark the beginning of a contraction. If November's results also roll in lower than October's, then we can start to be concerned. After all, though the bigger trend is still an upward-pointing one, the pace of growth has slowed considerably on both fronts, peaking well short of the prior peak rates seen in 2007 and 2008.

Industrial Production and Capacity Utilization





Economic Calendar





The coming week is going to be considerably busier, though we still won't be hearing a great deal of data we'd consider highly important.

It's a fairly important week for the housing market, with the NAHB index figure for Q3 due on Monday, the MBA mortgage index due on Wednesday, and the existing home sales number also due on Wednesday. It doesn't look like there's any real growth in the cards there.

It's also going to be a telling week on the inflation front, with PPI figures for October due on Thursday, and CPI numbers coming out on Wednesday (yes, this is one of those weird months where consumer inflation data comes out before producer inflation does). Either way, the pros aren't expecting any real inflationary pressure. As of the last look, the annualized inflation rate stands at a tepid - and perhaps troubling - level of 1.18%.

Stock Market Index Analysis

As was noted above, the S&P 500 gained 1.55% last week, up 27.57 points, to close at 1798.18. That move carried the index to record highs, again, jump-starting a "the stronger it gets, the stronger it gets" mentality. So, from a momentum perspective alone, last week was something for the bulls to get excited about.

If there was ever a situation where the bulls need to be worried, however, this is it.

The bullish argument is simple enough, and seems solid - the S&P 500 pushed above the technical ceiling (dashed) at 1775, and looks like it's started another bullish leg.

The bearish argument isn't too shabby either, however . That argument is (1) the CBOE Volatility Index (VIX) (VXX) is frighteningly low, and (2) the S&P 500 itself has run into its upper 50-day Bollinger band and has so far been capped there. It's all on the chart below.

S&P 500 & VIX - Daily Chart





While it's conceivable that the S&P 500 could simply continue to "trace" the upper band line and continue to inch higher [that's probably a 50/50 proposition], the low VIX is a huge problem. Now with the VIX all the way back to the long-term floor around 12.30 (the VIX actually closed at 12.18 on Friday), it's at levels that have coincided with market tops. Granted, none of those tops have jump-started major market meltdowns, but they've started pullbacks of around 5%.... nothing you'd want to ride out if you can avoid it. And, sooner or later, we will get that bigger, 'normal' bull market correction of 10% or more. Could this be that time? We'll see.

Zooming out to the weekly chart doesn't really show us anything new or different, but it does give us some more perspective on the wall that the S&P 500 is now contending with. Once again, the SPX is dancing with the upper 52-week Bollinger band. This time though, the upper band line is also right where a long-term (straight-line) ceiling that extends back to late August is waiting; it's the upper dashed line on the chart. You can also see just how big of a deal the VIX's floor at 12.30 is when looking at the weekly chart.

SPX & VIX - Weekly Chart





It's also on the weekly chart that we can see where, in the event of a pullback, the S&P 500 is apt o find its first support level. It's 1701, where the 100-day moving average line (gray) and a long-term (straight-line) support level (dashed) have converged. Just keep in mind that both are rising, so the floor will be well above 1701 by the time that retest could happen.

With all of that being said, there's just one problem with the bearish argument here... it's irrelevant as long as the market keeps going up, and there's no evidence the bulls are ready to relinquish control. We'll need to see some real evidence that the market's started a pullback, and until we do, we'll have to keep assuming "the trend is your friend."

Evidence that a selloff has started will largely come in the form of (1) the VIX moving above its 20-day moving average line (blue), and even better, its ceiling(s) around 14.2, and/or (2) the S&P 500 falling back under the resistance level at 1775. By the time that could happen, the S&P 500's 20-day moving average line - which was support just a few days ago - will be at or above that mark, and falling under that short-term moving average line would be a huge bearish clue. Anything less than that, and the bulls will remain in the hunt.



Trade Well,

Price Headley

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