S&P Momentum Fading

April 25, 2016

While the S&P500 didn’t drop last week, the relentless upward momentum that started in late February seems to have weakened. The large cap index rose just a bit, 10 points, but that all occurred early in the week; the final three days of the week were all down or zero gain days. Volume was light, and volatility edged down only slightly because it was already near cycle lows in the previous week; in other words, volatility didn’t have much more room to fall, even if stocks rose my a meaningful amount, which didn’t happen.

On the macro front, the news was very weak. The housing market index kicked off the week with a miss relative to expectations. Housing starts also missed. The Philly Fed business outlook survey missed badly. The Chicago Fed National Activity Index fell more deeply into negative territory. Leading indicators disappointed. And PMI manufacturing index flash result also missed. The only positive news for the week was the better than expected initial claims index, which may start to reverse soon as firms such as Intel lay off 12,000 workers at a time, which they did last week. Finally, existing home sales came in slightly better than expected.

So the technical picture for last week is one of delay—the upward momentum seems to be fading in the S&P. But at the same time, a meaningful downward move has not started. So we have to wait one more week for the market to make a more visible decision. Will it continue rising and shake off the recent momentum loss? This could take it to new all-time highs.  Or will the recent loss of upward momentum shift into a harder downward move?  This would fit the long-term topping pattern that began well over a year ago.

Over the next five trading days, we’ll have our answer!

Final Line-in-the-Sand for US Stocks

April 18, 2016

After retreating the previous week, the S&P500 reversed those losses and rose 1.6% last week. But this reversal to the upside occurred on very light volume which again suggests that there wasn’t much conviction behind the rise and that additional short covering was also driving the jump. S&P volatility did retreat, but not quite back down to the lows seen in April.

Most of the major economic news last week was disappointing.  And as mentioned previously, this bad news on Main Street may actually help drive the US risk markets higher because traders then start betting that government policy response will increase and that this increase will boost risk asset prices.

Back to economic news: Both core PPI and CPI came in well below expectations. In the past, when robust economic growth is actually taking place, both these measures of inflation tend to tick higher. Instead, they are trending lower…..an outcome usually associated with weak economic growth if not actual economic contraction (ie. recession). Retail sales missed badly—both the headline figure and the more stable ex-autos figures came in well below expectations. Industrial production was a disaster, plunging by 0.6% instead of the 0.1% predicted dip. Finally, consumer sentiment also missed. On the positive side of the ledger, initial jobless claims were a bit better than expected and the Empire State manufacturing survey beat expectations.

The technical picture for the S&P500 is now coming into clear focus—-if stocks don’t retreat from these levels, then there are no more strong technical arguments for them to fall. And instead, they may (despite all the historical evidence to the contrary) actually break out to the upside. In other words, if the technical picture suggests that a breakdown is likely, and this breakdown fails to occur, then the market technicians and traders who follow this analysis will consider betting that the reverse (ie. a break to the upside) will happen.

Amazingly, if such a break out were to happen, then it would be happening from levels on the S&P500 (roughly 2,075) that are already near all-time highs. But what’s really scary is what’s been happening to corporate sales and profits—they’ve both been falling meaningfully. And the last time corporate sales and more important profits were at current levels about two years ago, the S&P500 was trading at around 1,600 or roughly 23% lower than where it’s trading today.

So buyer beware.

US Stocks Retreat at Resistance

April 11, 2016

The S&P500 backed off last week, dropping about 1.2% on light volume. Volatility, as measured by the VIX index, stopped falling and leveled off near the lows of the year.

There weren’t many US economic reports released last week. The Labor Market Conditions Index came in with a weak (ie. negative) reading. Factory orders missed expectations, coming in more negative than was already expected. International trade was weaker than expected. And wholesale trade missed, badly. On the positive side, ISM services beat estimates, but only slightly. And initial jobless claims were slightly stronger than expected.

Not surprisingly, the S&P500 followed an expected path last week, by losing momentum and turning down just a bit below these levels where it turned down back in November 2015. By starting to turn down here, the S&P is following a huge topping pattern that started at the end of 2014. Basically, this pattern is a range-bound market, with one final, yet innocent looking peak (this happened in May 2015), followed by sharp drops and sharp recoveries where each drop touches a lower low and each successive recovery touches a lower high.

So far, this is exactly what’s been happening. And this long-term topping pattern is exactly what preceded most every bear market in the last 100 years, with one notable exception being crash in 1987.

Will last week’s downturn kick off the next sharp drop? This isn’t clear yet, but if the 200 day moving average doesn’t hold (somewhere around 2.010 on the S&P), then many technical traders—who are very familiar with long-term topping formations—will look to sell their long positions and begin to go short. This would then put additional downward pressure on the US stock markets, and other non-technical traders and investors would follow by selling.

Keep in mind that the 50 day moving average is still below the 200 day, and the 200 day is still sloping downwards. So most technical traders are still on red alert for any major reversal of the recent bounce because these major long-term signals have not turned bullish.

For all these negative technical warning signs to fail, the S&P would have to embark on another major move upward, well above 2,100.  And while not impossible (nothing is) that would be a tall order.

S&P 500 Rises while US 10 Year Treasurie Yields Fall

April 4, 2016

The S&P500 reversed the prior week’s slide and jumped back up 1.8% on nothing but more hopes that the major central banks of the world would once again intervene to prop up financial markets. What also made the weekly price rise not so credible was the fact that volume was abysmally low—there was very little conviction to the melt up in prices. And volatility dipped back down, with the VIX index returning to the low end of its long-term range.

In macro news, the results were mostly weak, as usual. Personal spending only met expectations, and these expectations were only barely above zero. International trade missed. The Case Shiller home price index missed on the month-to-month 20 city report; the massive rebound in housing prices that started in 2012 is now showing signs of slowing down…..and even possibly going into reverse. Initial jobless claims were slightly worse than expected. Chicago PMI was better than expected. The big report of the week—March payrolls—was not all that strong. While the headline jobs number very slightly beat consensus estimates, we must remember that the new jobs being added month after month over the last four years have been low quality jobs (think bartenders) while high quality jobs with benefits (think manufacturing workers) have been disappearing throughout this entire period. Also, the unemployment rate went the wrong way—up. It was supposed to remain steady. And finally, the average hourly workweek missed expectations, but average hourly earnings beat them.

The technical story in the S&P500 is showing an extremely overbought market on the daily charts. The massive rebound that dominated the month of March has now pushed the S&P near the levels reached last fall when the market suddenly reversed and went on to touch new post-peak lows in February on this year. Meanwhile, the 50 day moving average is still below the 200 day, and the 200 day is still sloping downward, even if only slightly.

Finally, while the S&P500 bounced higher last week, something very different happened in the US Treasury markets. There, yields plunged….pretty much across the board. Why is this important?  Because usually when stock market prices rise, Treasury yields also rise (investors sell Treasuries to free up cash to buy stocks; selling Treasuries pushes up their yields). But since the middle of March—even as the S&P500 has been rising—Treasury yields have been falling. And this completely contradicts the rise in US stock prices. More importantly, US Treasuries traders tend to me quite a bit more sophisticated than stock market traders (when have you ever read about mom-and-pop Treasury traders!?) and very often, what happens in Treasury markets turns out to be “right” more that what happens in the stock markets…..and Treasury markets tend to “lead” stock markets in terms of time.

So if Treasury traders turn out to be right and early once again, then US stock markets are about to turn down……once again.