US Equity Market Rebound Reversing?

Just like that, not only did the S&P500 fail to continue to rise last week… a bid to transform the rebound into a new bull market move to even higher highs…..but the S&P reversed course and tumbled. Actually, it was more like a major reversal—the S&P500 lost a whopping 3.6% in five trading days. Volume was modest; in other words, this was no panic rush for the exits among investors or traders. And volatility while rising notably, didn’t spike anywhere near the levels seen in later August.

Interestingly, there was no obvious catalyst for the weekly drop in equity prices. And while the US economic reports were weak as usual, they weren’t catastrophically bad. Initial jobless claims, for example, inched up but still came in well below 300,000. Wholesale trade actually beat expectations; that said, the inventory to sales ratio spiked to new cycle highs, and this portends a manufacturing slowdown in the near future (to work off the excess inventories). Consumer sentiment also slightly beat consensus estimates. On the negative side, retail sales missed expectations; and retail sales excluding autos missed very badly.  Also, producer prices, both headline and core, fell notably; in a healthy economy, both prices measures should be increasing slightly. So all in all, we saw the same story in the US economy—very weak growth, but no suddenly shocking collapse in results.

Technically, the S&P500 is still in a bear market mode—primarily because the 50 day moving average is still well below the 200 day moving average. And after last week’s loss, it will be even more difficult for this “Death Cross” to be reversed.

So now the US equity markets are facing a bigger challenge—since the upward “rebound” momentum that began in early October has suddenly ended, it will be more difficult for further near-term moves higher to occur. In other words, US equity markets, having lost their prior reason for rising (upward momentum of the bounce) will now need something new, some other reason for them to reverse last week’s decline and push back up.

Getting this new bullish catalyst will be more difficult for bullish traders than it would have been to continue to ride upward momentum.

If markets fail to reverse last week’s losses this week or next, then a resumption of the August downturn becomes much more likely.

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