Pause in Equity Bounce!

The S&P500 slipped a tiny fraction of one percent last week, mostly due to a sell-off on Friday. Volume for the week overall was very light, meaning that there was no strong conviction behind the selling. And volatility inched up only slightly, which also means that investors were far from getting worried.

Despite the minor dip, or more accurately, because the dip was so small, the technical picture for the S&P500 has not changed much. It’s still extremely overbought, not far from its upper Bollinger band on the daily charts and almost touching this band on the weekly charts. Prices are not only comfortably above the 200 day moving average, but they’re also still above the 50 day moving average. And most importantly, since the 200 day moving average is still sloping upward—as it has been since 2011 the last time we’ve seen a serious correction—the bull market cycle is still in effect.

US macro data, while light in terms of the number or releases, was mixed last week. Existing home sales just beat expectations, but they’re notably off last year’s levels. In other words, the strong rebound in the US housing market since mid 2012 is now showing signs of slowing down. The Richmond Fed manufacturing survey beat consensus estimates, as did durable goods orders—both headline and ex-transportation. But initial jobless claims missed….they jumped unexpectedly. And both the Kansas City Fed manufacturing survey and PMI flash services missed estimates.

Interestingly, the S&P500 is not acting like it did for most of 2012 and all of 2013. Since reaching the mid-1800’s in late December 2013, it has essentially gone nowhere since then……and it’s now almost May. It appears that the strong upward momentum that powered the S&P higher for one and a half years has weakened.

One way this can be seen is in the slope of the 200 day average. While it’s still upward sloping, as mentioned above, it’s clear that the slope (upward) is not as steep as it used to be.

Could this be a prelude to a more serious correction? While nobody knows for certain, it is true that all major corrections will bend this moving average—first to a flat slope, and then—if the correction is more serious—to a downward slope.

So this recent, multi-month pause in the pace of the rise in the S&P is noteworthy. Many technicians would describe it as a drawn out topping process, a process that often leads to more severe price drops.

And if prices fail to advance much further, then the 50 day moving average will start to pinch into the 200 day moving average. At that point, if the 50 day crosses below the 200 day, we would have a problem, a problem called the “death cross” which would cause many technical traders to exit their long positions until the death cross is reversed (via a “golden cross”).

The next few weeks should be very interesting!

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