Well it happened again. After taking a beating (this time the worst in two years), the S&P500 has come roaring back. The index jumped just over 4 percent. But of course, since prices went up, volume went down as it has usually done in any other week when stock prices have risen. Volatility fell back quite a bit, also as expected, but not nearly back to the ultra-complacent levels that served as a backdrop for the FED-induced melt-up over the last two years.
Us macro news, weak as ever, had little to do with this equity market action…..as has been the case over the last couple of years. Last week, existing home sales beat expectations. but only slightly. Initial jobless claims are hitting new cycle lows, but the very same thing happened in early 200 and mid 2007. PMI flash manufacturing came in weaker than expected. The Kansas City Fed manufacturing survey also disappointed. But leading indicators and new home sales beat consensus estimates.
The technical picture for the S&P500 is extremely interesting right now. As noted last week, given that the S&P had been somewhat oversold on the daily charts, the key tests would be the 200 day moving average and the 50 day moving average. Well very quickly, and very early last week, the S&P re-captured the 200 day moving average. Then by the end of the week, the S&P approached….but not quite crossed….the 50 day moving average.
So the US stock markets passed the first test to recovery. Prices are now sitting at the doorstep of the second test…..crossing above, and moving onward from, the 500 day moving average.
Next week, this question will be answered. If prices manage to recapture the 50 day moving average then the final test will be the return to all-time highs set in September.
But for this “coast is clear” event to happen, and for it to be somewhat sustainable, then the market internals will also have to improve. In short, this means that if prices in the index return to all-time highs, but this happens due to the narrow leadership of a sliver of key leadership stocks (rather than the broad participation of most stocks), then the recovery will be suspect, and vulnerable to abrupt reversals.
But first things first. Let’s see what happens early next week, and take it from there. All eyes on the 50 day moving average!