After skidding the prior week, the S&P500 inched back up about 0.5% the last week….on slightly higher volume. Volatility, as usual during a week when prices rise, crept back down. But the VIX index has not returned back down anywhere close to the lows seen during the summer months. Investors are much less complacent now.
Most of the US economic reports were released at the end of the week, and most of them were bad. Initial jobless claims rose instead of falling as expected. Retail sales were a disaster—both the headline number and the ex-autos number came in well below expectations. The Empire State manufacturing survey missed. Industrial production also missed. Business inventories missed. And consumer sentiment…..you guessed it…..missed. By all accounts, the US economy is not doing very well.
A very interesting technical picture is emerging for the S&P500. Over the last two years, a long-term topping formation has been forming, but this formation has been challenged lately, especially as earlier this year, the S&P rose above 2,100.
But more recently, the S&P500 has begun forming a short-term topping formation. After dropping for a couple of days in June after the Brexit vote, the S&P recovered all those losses and rose almost all the way up to 2,200 in July. But since then, the index has gone nowhere. More importantly, several key momentum indicators have turned down notably. MACD, for example, had turned bearish since late July. RSI has been deteriorating since mid July. And many others have done the same.
A week ago, the price of the index dropped below the 50 day moving average and has not recovered. Unless, this happens, a very reasonable downside target—and test—will be the 200 day moving average. This lies at around 2,058 or 4% below current prices.
Sure, a 4% drop would not be a huge loss in the context of the massive run up over the last several years, but the S&& has not seen any type of similar losses since Brexit in late June and since the somewhat larger losses in late January.
So a 4% loss, in today’s world, would be noteworthy.