Although US stocks had a strong close on Friday, they still managed to drop lower for the week overall. The S&P500 lost just over 0.8% despite the strong Friday. Volume has started to creep higher, which is a bad sign because it means that investors are starting to de-risk not by hedging or insuring their long positions but by exiting their long positions outright. Another bad sign—S&P volatility crept higher so while some investors were simply cutting back on their stock holdings, others did continue to pay up for insuring the exposure they already had.
In economic news, the US economy featured a batch of bad news last week. Sure initial jobless claims were slightly stronger than expected, but most everyone forgets that the labor market is a lagging indicator, not a leading indicator for the US economy. Retail sales barely budged. Export prices plunged. Consumer confidence sank. And worst of all, the inventory to sales ratio for US manufacturers soared to another cyclical high level….a level that almost always signals that a recession is dead ahead (because to bring the ratio back in line, factories must drastically cut back on production).
The technical picture suggests that on the one hand, the S&P 500 is still quite oversold, especially on the daily charts. And a bounce, a real one that lasts for a week or two (not just a day or two) would be very normal to see right about now. On the other hand, the longer term weekly charts are still very bearish. They’re still pointing to the same risk that we’ve pointed out over the last couple of weeks here—that the entire US stock market is sitting on the edge of a cliff. And if the stock market doesn’t firm up by decisively backing away from this edge, then it risks dropping more…..a lot more.
The charts literally show nothing but air between current prices in the S&P, and prices that are 15-20% lower, where real support may finally kick in. So the bottom line is this—the risk for US stock markets is much more serious today than it has been for many years.