Final Line-in-the-Sand for US Stocks

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… 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.

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