Is this Sell Off Meaningful?

The S&P500 2.6% last week. Amazingly, this was the largest weekly fall in the index since 2012. Volume surged on the largest down day, Friday. Volume for the week was light but only because Monday was a federal holiday. Volatility surged, as one would expect. The VIX index spiked by almost 50%, but that said, it still closed the week under 20, which is not a level historically associated with market panics. It would take a VIX surge above 30 for that to happen, and the VIX has not jumped above 30 since 2011, or almost three years.

Technically, the S&P is still very over bought. The drop over last two weeks has pulled back the index only slightly from its upper Bollinger band. In terms of breadth, the percent of stocks above their 150 day moving average is still close to 70%. And the Summation Index has not turned down. So breadth, while not as strong as it was a couple of weeks ago, has not collapsed.

Away from Wall Street in the real economy, things are still not looking good. The Chicago Fed National Activity Index fell substantially from its prior reading. The PMI manufacturing index, while still in expansionary mode, missed expectations. Both existing home sales and the FHFA house price index also missed. Initial jobless claims and leading indicators only met expectations. So while the number of reports was light during the holiday shortened week, the overall picture remains the same—one of an economy limping along, without strong growth.

So while last week’s drop in the S&P was notable, is it necessarily the start of something more serious? Is this the big turn that a lot of bears have been warning about?

The answer is simply—we don’t know. It’s far too early to tell if this is it. Yes the 50 day moving average has been broken, and decisively so. But over the last three years, ever since the 19% sell off in mid 2011, any and all dips below the 50 day moving average have been met with strong buying which then went on to take the S&P to new highs. On the two occasions since 2011 when the S&P cracked the 200 day moving average (both in 2012), the same thing happened—the buy-the-dip forces jumped in with both feet and not only recovered all the losses but propelled the index to new highs.

So until, or unless, the S&P500 closes below its 200 day moving average, we can’t even begin to discuss a major change in trend. And even when that happens, it a bear market will be called only after the S&P climbs back up to the 200 day from beneath and fails to move above it decisively. If this were to happen, the slope of the 200 day will start to shift down (it’s still firmly upward sloping), and when it becomes firmly downward sloping, the bears will very likely take control of the US equity markets.

After last week’s drop, we are a long way from calling a new bear market.

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