Just as expected….if not actually predicted….here last week, the S&P500 bounced back up from an extremely oversold condition on the shorter-term daily charts. The S&P ended the week up 1.75% with an especially strong Friday that generated all of the gains for the week. Volume was moderate, just a touch lower than it was during the prior week when the S&P fell. And volatility inched back down, as one would expect in a week that showed price gains.
Last week’s economic reports were mostly disappointing….with signs of an oncoming recession growing even stronger. The week kicked off with a dismal Dallas Fed manufacturing survey, which continued to register deeply negative results. The Richmond Fed also fell notably. Durable goods orders collapsed. Both headline orders and orders excluding transportation were disastrous. Pending home sales also disappointed. Fourth quarter GDP results came in weaker than expected. And consumer sentiment missed. On the positive side, new home sales beat consensus estimates, and the Chicago PMI surprisingly beat expectations; but let’s see what the next month’s Chicago PMI looks like because this number is often very volatile.
The technical picture is—as noted in the opening—showing a very predictable pattern: a large multi-week loss in the S&P is followed by a modest bounce. The question, as also mentioned last week, is this—will the bounce continue, or will it we sold. On the positive side, last week’s bounce is very minor compared to the huge losses suffered earlier in the month of January. That means that the bounce could still be just that—a temporary bounce—before more selling resumes afterwards. There’s a lot more room for the S&P500 to rise before it runs into very strong resistance at the underside of the 200 day moving average. So it can continue “bouncing” for another 100 S&P points….all the way up to about 2,040 before the downtrend would come into play.
This doesn’t mean that such a huge bounce must happen, but only that if it did, it would be entirely within the definition of a short-term counter rally.
The big question everyone is asking is whether or not the big selling we saw in January will continue, and given the severe technical damage done to the US equity markets in that month, the evidence favors a continuation of this selling in the upcoming months.
But once again, only time will tell for sure.