And a Bounce is What we Got

Exactly as anticipated, the S&P500 bounced last week. While the jump was impressive, over 3.6%, the volume was abysmally low, meaning that this was more of a technical rebound rather than a fundamental rush by new money to buy stocks. Volatility, because it was already historically low, dipped only slightly.

Was there any significant news to aid the rebound? Not really. No progress was made in Greece or Spain. Japan is still sliding into recession. China is still in the middle of a hard landing. The US is still not struggling economically. And the tension in the Middle East, while lessened by the truce in Gaza, is still very much simmering.

In US macro news, existing home sales beat–slightly–expectations, but the prior month’s results were revised downward. Initial jobless claims stayed above the critically important 400,000 threshold; sure some of this is still explained by Hurricane Sandy, but perhaps not all of the recent surge above the mid-300,000 level we’ve been accustomed to for almost a year. Consumer sentiment missed expectations and leading indicators met expectations. Both of these measures, by the way, do not hold a lot of value because they’re highly subjective, subject to huge adjustments (ie. manipulation), or both.

Technically, the S&P500 is still in a downtrend that began in late September. And prices would have to rise well above 1460 to break this downtrend. This technical assessment holds, quite strongly, for both the daily and the weekly charts.

Interestingly, in only a week, the S&P has gone from being oversold to actually being somewhat overbought, because of the large magnitude of the jump. The McClellan Oscillator is now signalling a strong possibility of a pullback over the next several days.

What can drive this pullback? Well, for starters, the fiscal cliff is still far from being resolved. Adding to the pressure is the fact that Congress will be in session a grand total of only 12 days before the end of the year and the triggering of the fiscal cliff. The odds do not look good, at this time, that Congress and the president will come to a mutually agreeable solution, in time to prevent the markets from reacting negatively. Just as in the summer of 2011, perhaps it will take a panic in the stock and bond markets for the politicians to get scared into making a deal.

Also, as mentioned earlier, tensions in Greece and Spain are continuing to build. And even if the compliant leaders of these ailing states do satisfy the demands of the EU, the ECB and the IMF, there’s a growing risk that the citizens of these respective nations will not agree to the terms of any agreement. Civil unrest—or worse—is now a growing threat in Greece and Spain.

And the list goes on.

So while we enjoyed a strong bounce, one that could even continue for a while longer, the technicals and the fundamentals are still signalling stormy times ahead.

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