As expected, the S&P 500 did move from a phase of fading momentum into a downturn. Last week, the S&P dropped 1.3%, which is not a huge loss, but a loss than confirms the momentum shift (downwards) and a loss that portends further losses ahead. More on this below.
As one would expect, volatility in the S&P rose as prices fell, and volume crept higher which adds some validity to the loss in price (if volume fell during a down price week, then the lower volume would contradict the price drop).
As usual, the US macro reports were mostly bad. New home sales missed expectations. The Dallas Fed manufacturing survey also missed. Durable goods orders—both headline and ex-autos—missed badly. Consumer confidence missed. First quarter GDP growth missed. The Kansas City Fed manufacturing survey missed. Personal spending missed. Chicago PMI missed badly. And consumer confidence also missed. On the bright side, international trade beat expectations, and so did pending home sales. PMI flash services also beat estimates. And finally, personal income was a bit higher than expected. But all in all, the sum of all the reports over the last several months continue to suggest one thing—that the US economy is slowing further, and that there is nothing on the horizon to suggest that it will get stronger.
So the technical picture is what really changed after last week’s drop on the S&P. The week before, we could only discern a slowdown in momentum and the stronger possibility of a price drop ahead. But after last week’s 1.3% drop, the momentum loss has been confirmed, and the S&P500 looks poised to lose more points, and possibly in a meaningful way. On the daily charts, the uptrend line that began in late February has been broken, so there will be many technical traders looking to lighten up their long positions before more severe selling can begin—but this act by itself my actually deepen any impending sell-off. Working in the bulls favor is the fact that the 50 day moving average has crossed back above the 200 day; that said, the same thing happened in late December, and this “golden cross” turned out to be a false bull signal, because shortly afterwards, the S&P went on to lose over 300 points.
The next two weeks will be critical to confirming whether this recent turn down will have legs…..as it did in August of 2015 and January 2016.