The S&P500 Continues to Bounce

As expected (from last week “when a big reversal like this happens in markets, there is often a decent follow-through. This means that the bounce that began last week can easily persist for another several weeks”), the S&P500 bounced some more. This time it surged about 3.3% on moderate volume. Volume was moderate, mainly because the evidence suggests that the surge in prices was caused more by short covering than by a rush of new investors into the stock market. And volatility dropped back down quite a bit, as would be expected during a week when prices jump. The VIX index fell almost 20%. That said, it still ended the week way above the sleepy and complacent levels seen over the summer months.

In economic news last week, the news was pretty much all bad. The PMI services index started the week off on a down note—missing expectations of a small drop by registering a large drop. The labor market conditions index also missed expectations. And the more important ISM services index plunged, vs expectations, because of collapse in new orders. Then, consumer credit fell, instead of rising as predicted. Import prices came in higher than expected; this puts even more pressure on corporate earnings. And finally, the inventory to sales ratio for the economy is screaming that a recession is imminent. Why?  When the US economy produces inventory (which adds to economic growth rates) but does not sell it (which does not necessarily detract from growth rates), the natural “fix” to this problem is to cut back on production of inventory, so that the excess ratio of inventory to sales can be reduced. But the result—driven by a drop in production—almost always leads to a recession. And this situation can now predicted with a high degree of confidence, because the ratio has now reached levels that match or exceed every other recent level that immediately preceded a recession!

Finally, as predicted last week, the follow through in the US stock markets continued last week. And the first hurdle—recovering above the 50 day moving average—has been met. But the second hurdle—recovering above the 200 day moving average—has not yet been achieved. And  for the “correction” to be declared over, this must happen. So all yes are now on the 2,060 level of the S&P, where the 200 day resistance now sits. Let’s see if the S&P can power through this level over the next week or two. If not, then we can easily see a resumption in the downturn that first got underway in August.

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