Like magic, the entire 11% drop in the S&P500 has been recouped. After moving above 2,120 in July, the S&P dropped below 1,880 in August. Remember, because the index fell only about 10%, this was considered to be only a correction, not even remotely close to a bear market which requires at least a 20% drop to be recognized. But then after testing the lows again in late September—and holding them—the S&P5oo rebounded all the way back up to (but not quite above) 2,120 again.
Last week’s gain was 0.95%. Volume was modest, and contradicting the rise in prices, volatility as measured by the VIX index crept up slightly, which suggests that many traders are recognizing that markets approach major resistance when they rebound back from notable losses.
In economic news, the week began with a so-so report from ISM manufacturing which only met expectations. Construction spending beat estimates slightly. On the other hand, factory orders missed as did the ADP employment report. ISM services beat consensus estimates. Productivity also beat estimates, but remember that while this is good for corporations in the short run, in the long run it means that consumers as a whole (employed and unemployed) may be earning less money with which to buy the products that the corporations sell. Initial jobless claims were slightly better than expected. And on the surface, the headline payrolls number also surprised to the upside, by recording a much larger number than experts had expected. On the downside, about half the jobs gains came from the government’s birth-death model (in other words, the jobs were “assumed” to be created), and the labor force participation rate did not improve at all. Instead, it remained at lows last seen in 1977. So while the headline unemployment rate looked great (5%), the labor force participation rate was the lowest in almost 40 years!
Finally, now that the S&P500—as already mentioned—has recovered most of its recent losses, a big test lies directly ahead: will the return to the prior highs create major resistance and downward pressure on prices (because everyone who’s been underwater on paper has now recouped their losses, and may seek to “get out”) or will the upward momentum be so strong as to overcome the sellers seeking to get out and to power the S&P upward to another notable new high?
This upcoming week is about all we’ll need to find out.