Still No Rebound in the S&P 500

The S&P500 lost another 0.4% last week on rising volume. The rising volume is ominous, because it suggests that the number of sellers was increasing which in turn suggests that the week’s loss could be followed  by more selling. Adding to this risk was the big jump in volatility. The VIX rose back into the upper teens, and while this is by no means a panic level, it’s certainly above the ultra-low levels near which the VIX spent most of 2013.

Technically, the S&P 500 is still quite overbought. It’s important to remember that despite the tree weeks of losses, the S&P is still less than 4% off its all time highs. While notable, such a small total loss does not really eliminate the overbought condition, especially on the weekly and monthly resolutions. Sure, there’s room for a bounce on a day-to-day basis, but on longer time horizons, these are the conditions under which investors would religiously be buying the dips and pushing the index back up to new highs.

While the 50 day moving average has been taken out, the 100 day is still holding and the 200 day is still almost 5% away.

Breadth is weakening, which means that a larger and larger percentage of the index is suffering from the decline. That said, the percent of firms below their 150 day moving averages has still not declined to the lows of 2013 and are far away from the lows in 2012. The same conclusion can be drawn from the new highs minus the new lows. Although more stocks are participating in the sell off than usual, most are still near their recent highs.

Away from Wall Street, US economic data was especially weak over the last seven days. In housing, new home sales missed badly; the Case Shiller index of home prices dropped when it was expected to rise, and pending home sales collapsed and recorded their biggest miss in over three years. Durable goods orders, both headline and ex-autos, plunged. Initial jobless claims surged. Personal income showed zero growth, instead of the 0.2% growth that was expected. And real disposable income, on an annual basis, suffered its biggest drop since 1974. Main Street is hurting, and hurting badly.

So this leaves us with a stock market at a cross roads. For all of 2013, this would be the time when the faithful dip buyers would step up and buy with both hands knowing, or at least believing, that the Fed had their backs. And for this bull market trend to continue, THIS is the week that the bounce must happen for the uptrend to continue to keep everyone believing in the magical rising stock market.

But if —for any reason—this bounce does not happen soon, then look out below. Over the last year, the equity markets have become so over-valued and so over-bought that there’s a risk that a small sell-off, if not quickly reversed, could become a big sell-off.

This could get very ugly, very fast.

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