A Sell-Off….Finally

Well it actually happened. The S&P500 sold off more than one percent in a week; it lost 1.01% to be precise. This still modest retreat, however, was the largest of the year, suggesting that the S&P is still very much over-bought and over-stretched.

As expected, when the stock market drops, volume rises. And it did…..jumping notably on every day the market dropped. Again, this supports the argument that the stock markets are artificially inflated by the Fed; if they weren’t, then rising stock prices would be accompanied by RISING volume instead.

Volatility also rose, as would be expected in a down week. But while the VIX jumped almost 10%, it’s still very much near historical lows, leaving the stock market a great deal of room to fall more with accompanying rises in volatility.

US macro data was, in a word, ugly. While most mainstream media pundits are peddling stories of organic economic growth and slowly improving job markets, the actual data are not complying.  ISM manufacturing, for example, plunged. Instead of coming in unchanged, as expected, slumped to near-contraction levels. Factory orders, less volatile transportation, also missed. ISM services fell notably; it was expected to come in unchanged. Initial jobless claims soared, instead of falling as expected. Claims are now perilously close to the critical 400 thousand level typically associated with recessions.

Finally, the March payrolls results were a total disaster. Only 88 thousand jobs were added, not the almost 200 thousand that were expected. And even this figure was boosted by the magical Birth/Death model which conjured up almost 100 thousand jobs out of thin air. Average hourly earnings stagnated’ they were supposed to rise 0.2%. And worst of all, almost 500,000 people left the workforce pushing the labor force participation rate down to its lowest level since 1979. This means that the job market is so bad that folks are giving up even bothering to look, while at the same time the overall population of the nation is growing. And perversely, this massive exodus from the labor force is what caused the headline unemployment rate to actually drop. It dropped not because the labor market got better. It dropped because the labor market is so bad that unemployed people give up even trying to find a job…..and this means that they’re no longer counted as being unemployed!

Technically, the US stock markets are still very over bought. It would take a drop of at least 5%, and better yet 10%, to conclusively relieve this over-stretched condition. Breadth continues to weaken and price appears to be losing its upward momentum. Upward volume, as already noted, is not strong. So the technical picture is still one where the risk to the downside seems to be greater than the risk that the market will suddenly surge much higher.

Again, a wide variety of catalysts could spark such a move lower. In the US, economic growth fears or concerns about corporate profits or even doubts about the commitment of the Fed to easy money ALL could do the trick. Internationally, problems in euro-land, the middle east, or Asia could also do the trick. Worst of all, would be the catalyst that nobody has on their radar screens.,…the unknown, unknown. If such a risk were to materialize, then the markets would certainly not be prepared.

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