After the prior week’s drop, last week the S&P500 reversed course and gained 0.5%. But once again, this gain—as have most gains in this index lately—was accomplished with very little volume, and therefore very little conviction. Volatility as measured by the VIX index, dipped back down, but not all the way back down the lows reached in August.
US economic news was particularly poor last week. While personal income and personal spending met expectations, almost all the other reports for the week missed consensus expectations. The Dallas Fed manufacturing survey fell deeper into negative territory. The Case Shiller home price index missed badly. The Chicago PMI report was a disaster. Productivity continued plunging—which leads to soaring unit labor costs for corporations. The ISM manufacturing index crashed into contraction levels, well below expectations. Construction spending also missed badly. Factory orders also missed. And the big number of the week, payrolls for August, was a disappointment. In addition, the headline unemployment rate ticked higher (not good). And both average hourly earnings and the average workweek missed expectations. Many of these major economic indicators are now solidly at levels associated with recessions in the past; we’re going to have to wait and see if the same situation is occurring today as well.
Since the beginning of July, the S&P500 has gone essentially nowhere. While it dipped back down to about 2,000 in late June, it spiked back up to around 2,175 immediately afterwards and has not moved far from this level ever since. So this important large cap index continues to hover waiting for a catalyst to set its next course—up or down. Meanwhile, the price level is converging with the 50 day moving average, which will set up a test (ie. will prices bounce up from the 50 day or will they slide below?). But on the downside, the hovering over the last two months has virtually killed all upward momentum, and indicated for example by a declining set of MACD lines.
The bottom line is that the S&P500 is poised to take a turn—-upward or downward—very soon. It’s very unusual for this equity index to just sit at a price level for an extended period of time. And after two months of doing just that, it’s very likely that some sort of break out….or break down…..is around the corner.