The S&P500 lost another 1.4% last week, on moderate volume, which implies that the selling was not just technical, but was instead done by investors seeking to lighten up on their long positions and exit the market. Volatility, as measured by the VIX index also climbed somewhat, again confirming that there was some true conviction behind last week’s selling.
The economy last week, showed no signs of magically springing to life; the snails-pace creep forward continues. Existing home sales kicked off the week with a disappointing report. Then both the Atlanta Fed and the Richmond Fed regional surveys missed expectations. PMI flash manufacturing also missed. Durable goods, excluding the volatile auto figures, badly missed, as did the Chicago Fed National Activity Index. On the positive side, the FHFA house price index beat expectations and latest GDP revision came in slightly better than expected—but for the wrong reasons (inventory growth in goods, not final sales).
The technical picture is now mixed. Both a bullish and a bearish case can be made.
On the bullish side, the selling that we’ve been witnessing since August in the S&P500 has been slowing down. In other words, even though the last couple of weeks registered price drops, these drops were not as strong or severe as the initial drop that began in August. So momentum indicators on the daily charts are becoming less bearish and whenever big bounces have occurred in the past, they were preceded by improving momentum signals. So if there’s any good time for the S&P to start rebounding, if only just to the 200 day moving average, then it’s now–over the next week or two.
On the bearish side, the longer term charts are still decidedly negative for stocks. The Death Cross that first appeared in late August is still in effect…..and apparently working. The 200 day moving average is still sloping downwards, and stock prices have not crossed above this line, which is now functioning as a ceiling on or resistance to rising prices. Also, several other related risk asset markets are not behaving bullishly. Far from it, they’re breaking down even further. Commodities, led by oil and copper prices are still retreating. And high yield credit markets are still selling off. Both these markets point to more pain for US equity markets.
So if a bullish case can be made for US stocks over the short-term (ie. a bounce would not be surprising), a longer term bearish case is still compelling.
The main test will occur at the lows of the initial sell-off in August. If these lows are not broken, then stocks should bounce. But if these lows do not hold, then expect another leg down in US stock prices.