Last week the S&P500 managed to eke out a small gain, rising 0.4% on light volume. Volatility dipped back down, this time down to set new lows for the year; that said, volatility always tends to set yearly lows during the summer months when traders tend to take time off from the markets and take vacations.
So while new, yet marginal, all-time highs have been set in the S&P, the technicals still point to an extremely overbought market. On both the daily and more importantly the weekly charts, the S&P is pressing up against the upper levels of several well-followed ranges, such as the Bollinger Bands. What makes the technical situation even more risky is the fact that on a fundamental basis, the S&P500 is also extremely overvalued. For example, many price to sales and price to earnings measures now show that the S&P500 is more overvalued than at any time (other than in 1929 and 2000) in the last 100 years!
Still none of this means that it can’t rise even further.
Except for one big report, most of the economic news last week was disappointing. ISM manufacturing disappointed. Construction spending reported the weakest annual growth since 2011. Personal income missed expectations; personal spending beat expectations. ISM services also missed consensus estimates. Initial jobless claims came in worse than expected. International trade missed, and consumer credit growth also missed. The big beat of the week was the payrolls number which came in stronger than expected. But as usual, what this report does not specify is the quality of the jobs created. While more and more well-paid and benefited factory jobs continue to disappear, low-paying and unbenefited service jobs are growing. But it takes more than one job as a bartender or waitress to replace one lost factory job. Yet the BLS does not distinguish between the two.
Finally, back in January of this year, crude oil (West Texas) set a multi-year low in the upper $20’s. The problem with such a low oil price is that it virtually destroys the profits and the balance sheets of thousands of important companies in the energy space. And since this sector is so large, relative to the US economy, it’s implosion alone could adversely impact the entire economy. Yet since January, the price of oil has rebounded and in May it touched $50. Unfortunately, since then, it has turned back down, and last week oil fell back under $39.
So it will be interesting to watch what happens to this super important commodity over the next several weeks and months. Because if it drops back down into the low $30’s or worse, into the $20’s, then we will almost certainly see widespread bankruptcies in the energy space, and this could “spill over” to the rest of the US economy.