In one of the worst weekly performances in many years, the S&P500 lost almost 6% on moderate volume. Volatility jumped—the VIX index rose to the upper 20’s, the highest level since the August 2015 panic sell-off.
So not only did the Santa Claus rally fizzle last week, but as predicted last week, the US equity market was ripe for a more serious drop:
…beneath the surface, this market has become very dangerous for a long time now. And markets like these, when breadth deteriorates badly, are the very ones prone to crashes and major corrections.
Again, this is no guarantee that a crash or major correction will happen anytime soon. It’s just an observation that almost all US equity markets that have crashed in the past have looked eerily similar to the one that we see today.
And a 6% drop in only five trading days is a “serious drop”.
Before returning to the S&P, let’s touch on the US economic results, most of which were very weak again. ISM manufacturing missed (falling, instead of rising as expected). Construction spending cratered. PMI services fell. ISM services missed. Initial jobless claims missed. Wholesale trade also missed. And while the headline payrolls report looked strong, beneath the surface, things were not so rosy. Most of the jobs created were low paying jobs without benefits and usually part-time (think bartenders, waiters, etc.). Also the birth-death model conjured up several hundred thousand new jobs, without which, almost zero new jobs would have been created. And the number of folks out of the labor force (because they can’t find jobs) is still at record highs, so the unemployment rate is not nearly as strong as it looks—-ie. if all the people who want and need jobs actually looked for them, the unemployment rate would be closer to 10%, not the reported 5%. Finally, average hourly earnings stagnated, instead of rising as expected; this also suggests that while new jobs may be created, they don’t pay much, and it also suggests that existing workers don’t have much leverage to ask for and get pay raises.
The technical picture is now somewhat confusing for many market experts. Over the last three years, whenever US stocks have fallen anywhere near 10% (and most of the time the drops were less severe…..closer to 3-5%), it ended up being a great opportunity to “buy on the dip”. Why? Because the S&P would invariably, recover the initial loss and then proceed to set new all-time highs. Dip buyers have always been rewarded since 2011.
But this time, some market experts are asking if the fact that the “bounce” after the panic sell-off in August 2015 did NOT lead to a full recovery and it did not lead to the setting of new all-time highs together mean that investors should tread more carefully. This time, the highs were lower than the prior highs…..and this is a very ominous sign, because for the first time since 2011, dip buyers were not rewarded the same way. Instead, these market experts are now trying to determine if the market sentiment has changed to one where investors “sell the rallies”, in which case we’d expect to see a string of lower highs and just as importantly, lower lows.
How will we know for sure? Well since the higher high failed to be established post-August 2015, now we need to see if a lower low can also be set. This means that the lows of August must be tested….and broken to the downside. This KEY level is 1,867 on the S&P500. If this is reached, breached and not held for a daily close, then a LOT of market players could decide to get the hell out of dodge. The problem is that below 1,867 there is no obvious and strong support level….anywhere nearby the 1,867 level. Instead, the really meaningful support is somewhere almost 25% lower! And that’s a scary thought.