Last week the S&P500 ended virtually unchanged. Volatility dipped just a little….. back towards, but not quite at, the super low levels reached in the summer of 2014. Volume was very much ho-hum, as would be expected in a week when prices didn’t change.
The technical picture also didn’t change very much. Since the S&P retreated a couple of percentage points from its highs in May, the extreme overbought condition—especially on the daily charts—has abated. The major moving averages (the 50 day and the 200 day) are slightly more converted; that said, the 50 day is comfortably above the 200 day, so the dreaded “Death Cross” is not around the corner. Most technicians can argue the bull market is still if effect.
At the same time, momentum and other measures of market internals, have weakened quite notably. For example, the percent of stocks above their 50 day and 150 day moving averages has dropped quite a bit. So while the overall stock indices are still close to their all-time highs, internally, things look much weaker.
On the macro front, last week was nothing to write home about. To kick off the week, the labor market conditions index missed badly. While the number of job openings rose, initial jobless claims were worse than expected. Retail sales also missed. Import prices rose much more than predicted; this will hurt corporate profits. Producer prices were a little hotter than expected. But inventories jumped, and despite all the weakness in consumer income and spending over the last six months, the consumer sentiment index registered a rise. Go figure.
Finally, as already noted, the S&P500 is only a few percentage points off its highs…just about 3%. But what’s interesting is that despite the measly drop in prices (3% is nothing to write home about. 10% and even 20% are more meaningful) so far from the all-time highs, something interesting has happened to investor confidence—-it’s plunging. Measures of investor confidence include junk bond demand, safe haven demand, market volatility, put & call option ratios, and price breadth and momentum indicators. And these have all dropped a lot……after a 3% drop in the S&P, not a lot.
So one naturally wonders—if a tiny 3% drop in stock prices puts investors on edge, how are they going to feel when stock prices drop 10%, or gasp, even 20% in the future? Will total market panic ensue? Is there something even worse than panic to describe how they’ll feel?
No matter how investors react to larger future losses, it’s interesting to note how “on edge” they already are when they’re down only 3% from all time highs. To anyone with any common sense—forget about all deep market wisdom or experience—this should be a warning sign that the US equity markets are on the edge of all out panic.