The S&P500 dipped about 0.9% last week. The very light volume suggests that there was no strong conviction behind the selling; perhaps it was just the usual pre-summer lightening up than many investors do each spring (“sell in May and go away”). On the other hand, volatility did inch higher, but that would be expected in any down week and still, by the end of the week, the VIX index was not too far above 2015 lows. Fear has certainly not returned to US equity markets.
The news on the US economy has not changed; it’s still limping along as it has for several years now. Last week, the durable goods orders report was slightly better than expected. Consumer confidence and new home sales also beat their respective consensus estimates…..slightly. But everything else was mostly disappointing. The FHFA house price index missed. PMI flash services missed. The Dallas Fed manufacturing survey missed badly. Initial jobless claims came in worse than expected. Chicago PMI was a disaster. And the first quarter GDP shrank at an annualized rate of 0.7%. To repeat, the US economy actually contracted; but to be officially declared a recession, the US economy must shrink for two consecutive quarters.
Technical analysis still points to a market that’s overbought and forming a distribution pattern. While the pull back last week means the market is not quite as overbought as it was the week before, prices on the S&P500 are still hovering not far from the upper Bollinger band on the daily charts. And the bull market cycle is still intact—the 50 day moving average is above the 200 day moving average and the 200 day is still sloping upwards.
On the other hand, some more causes for concern have emerged. First, the Dow transports just experienced a Death Cross, where the 50 day moving average crossed below the 200 day moving average. This means the Dow transports are poised to enter a bear market, and the importance of this is the link between the transports and the main indices—transports have often (but not always) led the general indices. And if this happens again, then the bearish development in the transports is worrisome. Second, the S&P500 started the year 2015 just below 2,100 and now, fully five months later, it’s still near 2,100. So a lot of market watchers are starting to worry that this “stalling” in the upward momentum could be a sign of a larger change in direction. Of course, this could also be a speed bump on the road to more gains; but if so, then these gains must start showing up soon, as in over the next couple of months. If not, then we might get that correction that has long eluded the US equity markets. Very few people are predicting a crash, but quite a lot of market watchers are openly saying that at 20% correction is long overdue.