Minor Equity Sell-Off

The S&P500 lost almost 2.7% last week, in one of its biggest weekly sell-offs of the year….so far. Volume jumped, once again proving that when stocks sell off, there are more sellers than there are buyers when stocks melt up on lighter volume. And notably, the VIX index soared by over 30% for the week. That said, it still closed well  below 20 and therefore in no way does this suggest that any true panic selling has begun. For that to happen, VIX would have to jump above 30,which was last seen in mid-2011 when the S&P corrected by about 20%.

The technical charts have changed very little, despite this equity retreat. In fact, on the weekly charts, the 2.7% drop is barely visible. Prices are still comfortably above the 200 day moving average, and this average is still rising strongly; until both of these conditions change, any sell-offs should  be considered just that—minor dips. At the same time, the 50 day moving average was violated. But since this has happened three other times in 2014—without much further damage—we can’t read too much into this as well.

In macro news, there were a few positive reports, but as usual, more were disappointing. On the positive side, the PMI services flash index slightly beat expectations. Consumer confidence beat the consensus estimate. The first estimate of Q2 GDP beat expectations, but over the last year, all of the first estimates have been revised lower; don’t be surprised if the same happens with this first stab at economic growth in the 2nd quarter. Finally, ISM manufacturing also beat the consensus estimate. On the negative side, pending home sales collapsed, as did the Chicago PMI. Construction spending also disappointed. And the biggest number of the week—the July jobs report—was a disaster. The headline payroll figure came in well below expectations. The unemployment rate ticked up; it was supposed to stay flat. And average hourly earnings did not grow at all; they were supposed to jump 0.2%.

Overall, the week was eye-opening primarily because of the sell-off in risk assets. Yes, high yield credit had already been selling off hard for three straight weeks, and in many ways, stocks were only partly “catching up” to junk bonds. And there was no single catalyst for the sell-off.

So the takeaway is that no big conclusions should be drawn from this stock loss. The longer term technicals are still bullish, and nothing fundamentally with corporate profits changed dramatically (they’re still near record high levels). And finally, nothing external to the markets created any sort of shock; all of the geo-political problems (and there are a lot of them today) were already well known at the start of the week.

So in the very short term, the US equity markets are slightly oversold and some sort of bounce would  be very unsurprising. The question, as always over the last two years, is what happens after the initial bounce—will new highs be set (as usual)? Or will the bounce fail, and new lows for 2014 be established?

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