The S&P500 lost another 0.7% last week. This time, unlike the week before, volume rose a bit, suggesting that some more serious selling was going on. To add to the concern, although only slightly, volatility also inched up on the week. But it remains at the low end of its cyclical range.
Most of the week’s economic reports were weak, as usual. Personal spending missed expectations by a wide margin; instead of rising by 0.2%, it was unchanged. Personal income rose somewhat more than expected, but this doesn’t help economic growth because the greater income was saved, not spent on goods and services. Factory orders plunged; they were expected to be unchanged. This was the 8th negative print for factory orders in the last 9 months, and the 9th miss in the last 10 months. ISM services missed, as did the PMI services index. Productivity continued to disappoint. This means that wages as a percent of corporate sales are increasing and this means that negative pressure on corporate profits is building. The big number of the week—payrolls—beat expectations, but as in prior recent beats, the extra jobs came from severe seasonal adjustments and the addition of low-paying, un-benefited jobs such as waiting on restaurant tables, bartending, retail help. At the same time, the unemployment rate went the wrong way—it rose, and the gross number of employable people who are out of the workforce also rose.
The technical picture can be read two ways. The first is benign, and almost positive. With the recent mult-week pullback in prices in the books, the overbought nature of the US equity markets has abated somewhat on the daily charts. For most of the last two years, whenever this has happened, a strategy of buying the dips has been the correct strategy to follow. And for anyone wishing to continue with this approach, now is the time to buy more….on the dip….stocks.
The second way of reading the S&P from a technical analysis standpoint is more worrisome. Since the S&P500 has gone virtually nowhere for almost six months, key moving averages have started converging, or pinching. While the 50 day moving average was breached last week, this has not been a big concern for the S&P for a long time. But what has almost always held over the last two years is the 100 day moving average. While this support level broke down in October 2014, for most of the last two years it has been working. But now it’s about to be tested again. And if it fails to hold, then a test of the 200 day moving average becomes much more likely to happen. And that would mean another 2% drop from current prices. Because these major averages are converging, it no longer takes a huge move, in percentage terms, to break through any of them.
So once again, the US equity markets are coming to a crossroads.