Yo Yo in Equities

After last week’s severe drop, this week US stocks came roaring back. The S&P500 jumped just over 3% on moderate volume. And volatility, as would be expected during a week when stocks rose, dropped back down.

In terms of technical analysis, the S&P suddenly went from being slightly oversold, on the daily charts, to being slightly overbought. That’s what a 3%+ move over 5 trading days can do to prices on the daily charts. As of Friday last week, the S&P was hugging the upper Bollinger band and that suggests that it is somewhat overbought. On the weekly charts, the downturn that began a few weeks ago is still in effect, but that said, the longer-term uptrends, namely the 50 day moving average and more importantly the 200 day moving average, are still saying that the bull market has not ended…..yet.

The macro picture was mixed last week. On the negative side, personal spending fell more than expected. ISM manufacturing also disappointed. Construction spending missed expectations, as did factory orders. International trade came in far worse than expected (this will hurt upcoming GDP growth results), and productivity was far lower than experts had predicted. On the positive side, ISM services was slightly stronger than expected, and in the January payrolls report, more new jobs were created than economists had expected. That said, the headline unemployment rate went up (not a good sign) and labor force participation rates remain at multi-decade lows (a very bad sign……one that proves that there has been no true recovery in the US jobs market).

Finally, a comment on the recent yo-yo price movement in the US equities markets. Historically, when investors are unsure about where equity markets are headed, they tend to result in huge swings, swings like we’ve seen over the last several weeks. The last time we saw such price fluctuation was during the summer of 2011, and the end result was a market (the S&P500) that ended up losing just about 20% by early October of that year.

So yes, the S&P500 bounced back nicely last week, but the fact that it’s been jumping around so dramatically over the last month or so suggests that investors are on edge and that they would are willing to sell, far more eagerly than in the recent past, should they be given a good enough reason to do so. Clearly, this is not a positive development for US stock markets.

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