US Stocks—One Last Blow-Off Jump in Prices?

Well the S&P500 did meet its second big test last week. After retaking the 50 day moving average a couple of weeks ago, last Friday, it moved back above the 200 day moving average. Specifically, the S&P closed 2.1% higher on the week. Volume was modest and volatility continued sliding back down. That said, the VIX index is still about 50% above the lows reached during the summer months.

In economic news, there were only a few major reports last week and the results were mixed. Housing starts beat expectations but not due to single family home starts (a better measure of housing health) but due to multi-family home starts (more of a measure of investor confidence). Initial jobless claims beat expectations. And existing home sales also beat expectations. On the negative side, the Chicago Fed National Activity Index missed badly by registering a very negative result. Leading indicators also fell. And finally, the Kansas City Fed manufacturing survey reported a negative number….again.

The technical analysis picture is now becoming more bullish. While on the daily charts, the S&P500 has become somewhat overbought, and due for even a small pullback, the weekly charts are suggesting that the multi-week recovery in prices has more room to continue.  The next and final major test to confirm a true recovery in prices will be the reversal of the Death Cross and an upturn in the 200 day moving average. As of now, the 50 day moving average is still solidly below the 200 day moving average (the original Death Cross).  And this situation is far from being reversed; in other words, it would take far more than just another weekly gain of say 2% on the S&P to reverse this cross.  And also, the 200 day moving average is still sloping downward. This too would require many weeks of advances to reverse—ie. to bend the slope back upward.

So now that the recovery in prices is well underway, let’s see if the S&P500 has another major leg up left in its multi-year bull market. And if so, will this be the final “blow-off” top similar to what happened in 1998 and 1999 before a major bear market finally commenced? Remember, corporate sales and now earnings are falling for the S&P500 as a whole, and for prices to continue to rise, they will have to rise in direct opposition to sales and earnings trends. This does not usually happen, and if it does, not for very long.

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