US Equities Bounce…..Will the Selling Return?

After a horrific start to the new year, the S&P500 managed to stage a last minute rally (on Friday) and close the week up about 1.4%, but that was after suffering another frightening loss earlier in the week when the index fell to intraday lows that were last seen only in 2014. Volume was also heavy, but not as heavy as in the prior week when the index finished down for the week. And volatility dropped off by Friday, as one would expect when the index rallies in price.

News flow was light on the economic front. The housing market index missed expectations. Consumer prices came in lower than predicted….or hoped for; in other words, by official government measures, there is no inflation threat for American consumers. Housing starts missed. Initial jobless claims also missed; they jumped back up just beneath the 300,000 level. The Chicago Fed National Activity Index fell. On the positive side, The Philly Fed Business Outlook Survey fell, but just not as badly as expected. PMI Manufacturing Flash beat expectations, and so did existing home sales.

The technical picture is clearly showing a market that after selling off hard for several weeks wants to bounce back with some sort of relief rally. In many ways, this would be very unsurprising if it happened. Even in clear bear markets, stock indices don’t fall every day or every week. So if US stocks rallied this week and next week, this would be very normal.

On the other hand, the technical damage recorded in the S&P500 over the last several months (starting in August 2015 and ending last week) is extremely compelling and very bearish—several lines in the sand have been crossed. And this means that many dip buyers who have been accustomed to loading up on stocks every time they dipped are now sitting on losses. These buyers will be looking to reduce their losses. How? By waiting for prices to bounce back just enough for them to “break even”. The problem for US stock markets with this sentiment is that all rallies will be sold; in other words, all rallies will be looked upon by dip buyers as an opportunity to eliminate paper losses. So the real problem for all long-term investors, is that there is a lot of pent up selling pressure just waiting to reveal itself. And this will make it very difficult for US stock prices to rise a lot more…..at least for a while.

So all eyes will be on the bounce from last week. Will it last? If so, how much more will it last before the pent up selling pressure reasserts itself?

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