In one of its worst performances of the year, the S&P500 lost over 3.5% last week. Volume rose, but not by much; this means that the sell-off was not a true “rush to the exits” panic where most investors look to get out. Instead it was fairly orderly where some investors and traders reduced their long positions. As expected, volatility increased, but once again, not to true panic levels.
Still, the percentage drop was notable, if only because many, if not most investors, have been conditioned to expect losses (on the rare occasions when they’ve been occurring) to be much smaller, and even then, such losses are to be welcomed as buying opportunities. On the first count, the loss was much greater than usual over the last two years. So this was a new experience. On the second count, the next two weeks will tell if this sell-off will be bought and followed by the usual bounce, or if it will be followed by even subsequent losses that could add up to a real correction.
Technically, the S&P500 closed just at its 50 day moving average. So this moving average has still held as support. Unlike in October, when the S&P500 sliced through both the 50 and 200 day moving averages, last week’s loss is but a minor scratch. At the end of the day, the 50 day moving average is still in no danger of crossing below the 200 day, and the 200 day is rising robustly. We’d need to see at least 2 or 3 weeks of such losses before either one of these bull market indicators to fall apart. In fact, on the weekly charts, last week’s loss is barely even visible. The S&P is still overbought and it’s still overvalued, as measured by the Shiller (CAPE) price to earnings ratio.
On the economic front, things didn’t get much better last week. Initial jobless claims came in as expected. Yes, retail sales beat expectations, but business inventories and export prices missed. Also, producer price inflation came in far lower than expected.
While US equities are just a bit off their all-time highs, other markets are—for all intents and purposes—crashing. Crude oil, for example, by Friday’s close, was down almost 50% its highs of the year, highs reached just a few months ago. Several foreign currencies have also crashed, most notably the Russian Ruble. Sure this drop is related to the drop in the price of oil, but Russia’s geo-political prominence in the world means that there can be serious repercussions in the global financial system if Russian finances come under further stress. US energy and base materials firms are under severe stress—both equity and credit prices of these firms have been cratering. For example, Goodrich Petroleum’s stock price is down almost 90% since June! The Canadian dollar is falling and many other entities (such as credit providers to the energy and base materials sectors) are under severe pressure.
For the first time in several years, the “everything is fine in the markets” meme is starting to fall apart. Sure, many firms’ credit and stock prices are hanging on to, or near, all time high prices. But if a huge percentage of the US economy (and together, energy and base materials are very large) start to crumble, this can and will affect the rest of the credit and equity markets.