S&P500—Bullish and Bearish Cases

September 28, 2015

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.

Is Fed Easing No Longer Working?

September 21, 2015

After starting to bounce the prior week, the S&P500 resumed its decline last week. While not falling by a lot (only about 0.2%) the S&P failed to extend its rally off the lows reached in late August. Volume was a bit higher than it was the prior week when stocks rebounded. But volatility slumped back a bit, with the VIX index dipping back down to the lower 20’s. That said, the VIX index remained far more elevated than it’s been for the last three years—in other words, while prices have not dropped all that much from peak, investors remain very nervous about the potential for more downside movement.

On the technical front, two things stand out on the charts. First, the bounce off the August lows is still in effect, despite the slight retreat last week. For this bounce to fail officially, stocks would have to continue dropping this upcoming week, and by much more than only 0.2%. Second, on the weekly charts, the breakdown that got underway in August is still fully in effect. S&P prices as of Friday were still bell below both their 200 and 50 day moving averages. And more importantly, the 200 day moving average is still sloping downward. As mentioned here repeatedly over the last couple of years, both these developments are very bearish for the stock market, especially over medium term….despite the somewhat bullish bounce visible on the daily charts over the near term.

On the economic front, the reports last week were mostly disappointing. Retail sales missed, and more importantly, retail sales ex-autos also missed. The Empire State manufacturing survey again reported an abysmally low number, instead of rebounding as expected. Industrial production missed. Consumer prices came in below consensus estimates. Housing starts missed. The Philly Fed outlook collapsed, registering a 31 month low. For the week, only initial jobless claims came in slightly better than expected.

So the big news last week as the Fed announcement….specifically that the Fed would not raise interest rates, off the zero level, in September as many economists had predicted that they would do. The two major reactions were–First, what does the Fed know that’s so bad about the US economy that 9 years after last raising rates, they determined that it would be too risky to raise them by a mere 0.25%?  While the Fed did not point to one specific reason or risk, the consensus among most analysts was that the US economic situation is still too fragile to endure even a tiny rate increase. This is not a positive signal from the Fed. The second major reaction was very surprising. By not raising rates, the Fed was implicitly more dovish or accommodating to the financial markets, and over the past 6-7 years, whenever the Fed signaled more accommodation, risk asset markets rallied. But this time, the opposite happened. Instead of rallying, the US stock market for example, fell back. And this raises an important question—-is the Fed’s policy of accommodation no longer having a positive effect on markets?  Because if so, this would be a sea-change in terms of how markets react to Fed policy. And more importantly, it would portend a very negative outlook for US stocks. It would mean that for the first time in years, Fed easing would not work to prop up stock prices. Remember, the Fed was easing all the way from the beginning of the 2007-2009 stock market decline, so stocks can and do fall despite easing.

Could this mean that something similar is now happening….for the first time since 2007-2009?


Dead Cat Bounce in US Stocks?

September 14, 2015

Just as expected, the S&P500 bounced back a bit last week. The only real surprise was that the bounce was only about 40 points, or 2%.  As noted, the S&P can rally well over 100 more points before running into overhead resistance. Volume was very light, which is screaming the message that nobody is really jumping back into the stock market even when prices rise a bit. Volatility continued to fall off, but it still ended the week at far higher levels than were typical during the sleepy summer months.

There wasn’t too much in the way of economic reporting last week. Initial jobless claims met expectations…exactly. Wholesale trade missed. Producer prices, both headline and core, came in much higher than economists predicted. And consumer sentiment totally collapsed—it recorded its biggest miss (vs. expectations) on record.

Now let’s look at the technical picture. As mentioned, last week’s bounce was not unexpected. The only real surprise was that it was only about 40 points. What’s critical to remember is that the 50 day moving average has crossed below the 200 day (for the first time since 2011) and that the 200 day moving average has begun to slope downwards (also for the first time since 2011). These two developments have been profoundly bearish in the past.

What makes the 40 point bounce surprisingly small is that the S&P can rally all the way back up to roughly 2,070 before technical overhead resistance (think of it as a ceiling) starts to put a lot more pressure on stocks. Why? because that’s where a lot of the most recent (most likely mom and pop) stock buyers bought their stocks, and they naturally will want to try to break even. As soon as they do, they will start to get out….by selling.

Does this mean that the S&P will certainly return back up to the 2,070 level? Not at all. There’s a reasonable chance it won’t even get there before turning back down again. But if it does, there will be a lot of sellers who will certainly be looking to get out.

In the meantime, until the 50 day crosses back over the 200 day moving average AND the 200 day returns to an upward slope, we must be prepared for rallies to fail at or around the 200 day moving average.  Remember, this is the exact opposite of what’s been happening over the last three years—investors always bought the dips, especially the ones close to the 200 day moving average. And now, investors must be prepared to sell the rips….for the first time since 2011.


Is the S&P500 Crashing?

September 7, 2015

After last week’s unsurprising bounce, the S&P500 resumed its decline. This time, it fell another head turning 3.4% on volume that was notably higher than the dull levels seen during the summer months. Volatility also jumped. The VIX index popped almost 7% up to the mid-20 range, which is higher than where the VIX has been hovering since 2011.

US economic news has been unimpressive over the last several weeks. And last week’s results were particularly weak. Chicago PMI missed expectations. The Dallas Fed manufacturing survey was extremely bad. ISM manufacturing also missed, as did construction spending. ADP employment disappointed; factory orders disappointed even more. Initial jobless claims came in worse than predicted. Only ISM services came in better than expected. And the big number of the week—payrolls—missed. Only 173,000 new jobs were created, rather than the 223,000 expected by economists. And the unemployment rate improved slightly, but only because 261,000 unemployed people were so disgruntled, they left the workforce and as a result are no longer counted as unemployed.

The technical damage in the S&P500 continues to build up. Last week, we highlighted the Death Cross and its significance to technical traders. Hint—not good. This week, the fact that the S&P failed to extend the bounce and moved toward re-testing the lows from the initial break in August is another bad sign for bulls. As of Friday’s close, not only were prices well below the 200 day moving average, and not only was the 50 day below the 200 day moving average, but for the first time since mid 2011, when the S&P500 last dropped 20% from peak to trough, the slope of the 200 day moving average has turned down slightly.

So at this point, the case for a drop to at least 20% becomes more convincing. And the down-sloping 200 day moving average, if this were in fact the case, will begin to act not as support, but as resistance. This means that if and when prices bounce back up to the 200 day moving average from beneath it, the 200 day will act as a ceiling. Traders will begin to use this recovery level to exit their long positions and to minimize their losses …. from peak prices. And when this happens, prices resume their fall, in a way that is exactly opposite of the way they behaved when the 200 day was upward sloping.

So the big test of this technical theory will occur when prices approach the 200 day moving average. Keep in mind that there’s a long way to go to reach this level—as of Friday’s close, the S&P would need to recover to the mid-2000’s to do this. And since Friday’s close was at 1,921, that means that the S&P could rise well over 100 points before it would test this moving average and its resistance.

Like we said, the damage to the US equity markets has become very serious…. for the first time in four years.