The S&P climbed another 1.3% last week to close at 2,049. Volume once again was much lower than it was during the early 2016 weeks when the index was falling significantly. And volatility, as measured by the VIX index, continued to back down, but it hasn’t reached the levels seen during the height of the bounce in the fall of 2015.
In US economic news, the week began with a retail sales report that only met expectations. Retail sales ex-autos fell, but because they fell less than expected, this number was a beat. The Empire State Manufacturing Survey beat consensus estimates, but the housing market index missed. Consumer prices, both headline and core, came in slightly hotter than expected. Industrial production missed. The current account was far more negative than predicted. Leading indicators missed, and so did consumer sentiment. Both initial jobless claims and the Philly Fed business outlook beat their respective estimates.
Interestingly, the S&P has now returned to levels just above its 200 day moving average. This is about where the S&P recovered to in late 2015, after suffering from a big sell-off in late August. The index then wallowed around (a bit over and a bit below) the 200 day moving average for about two months, and then it reverted to a downtrend as the new year began in early January. Here are some notable differences: First, the index reached a new low (both intra day and daily closing) during its January and February sell-offs….when compared to the August 2015 lows. Second, the 50 day moving average is still well below the 200 day moving average now, as opposed to late December, when the 50 day returned back up to the 200 day. Third, the 200 day moving average is still sloping downward, unlike late November and early December when it leveled off to a neutral slope.
All these differences suggest that the technical damage incurred, first in the August 2015 sell-off and then in the January 2016 sell-off, has not been repaired. Market watchers and analysts do not have an “all clear” signal to jump back into the US equity markets and trade them from the long side. While many traders who went short have already been squeezed out (and this process itself has helped fuel the recent bounce), there are no signs that investors and traders have wholeheartedly switched to being bullish.
In terms of equity market catalysts, the Fed did put rate hikes on hold, if only for a short while, and the ECB has launched another large QE program. Both of these developments help firm up stock prices, But on the other hand, corporate sales….and more importantly corporate profits….have continued to erode. And this is a very important factor that supports the bearish argument.
So we’ll need to wait another week or two to see if US equity markets can continue to rally in the face of massively disappointing sales and profits reports, or if these markets will reverse course—just like they did at the very end of 2015—and return to their prior downtrend.