US Equity Pullback Continues

After jumping higher the on Monday, the S&P500 spent the rest of the week giving it all back and more—the S&P closed down about 0.5% by Friday’s close. Volume, while not very high, was higher than it usually is during weeks when the index climbs in price. And as one would expect, volatility inched higher—the VIX index rose back up to the mid-teens.

It was a quiet week in terms of US economic reports. The week kicked off with a weak Labor Market Conditions Index release—-it was negative again. Wholesale trade disappointed by registering a negative print instead of the positive one economists expected. Initial jobless claims jumped notably…..this hasn’t happened in a many months, and could perhaps be a sign that even the headline labor market (the one that ignores the millions of unemployed people who are not officially counted as “unemployed” because they stopped looking for work) is starting to weaken. Business inventories jumped; on the one hand, this provides a short-term boost to GDP, but the problem is that sales didn’t rise commensurately. This means that the inventory to sales ratio is way too high now……specifically, it signals that a production drop (ie. a recession) is imminent so that the ratio of inventory to sales can come back down to normal levels. On the positive side, job openings rose and retail sales were slightly stronger than expected.

With last week’s price drop in the S&P500, the technical picture that we’ve been sketching over the last several weeks is now becoming more clear—the S&P’s recent bounce, the one that started in mid-February, looks like it’s not only petered out, but it looks like a new short-term pullback has begun. The closest test to the downside will be the 200 day moving average, which sits at about 2,012 on the S&P. If this doesn’t hold, then a move back down to the January and February lows—around the mid-1,800’s—becomes much more likely.  Of course, if these lows of the year fail to hold, then there would be much more serious trouble to follow. But let’s examine this pullback one step at a time.  All eyes on the 200 day moving average.

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