S&P 500 in a Short-Term Topping Pattern?

After inching up very modestly the prior week, the S&P500 gave back almost 0.7% last week on light volume.  Meanwhile, volatility inched higher—the VIX index rose for the week, but that’s to be expected during a period when prices fell back.

In US economic news, the bad news returned, unsurprisingly to us. The week began with a poor reading from the PMI manufacturing index, which fell from the prior month’s reading. Then construction spending registered a disastrous negative print, instead of a positive one as expected by economists. ADP employment missed badly. International trade was much more negative than predicted; this will hurt the next GDP report. On the positive side, ISM manufacturing was a bit stronger than expected and sow was the ISM services index. But the biggest number of the week—and the biggest disappointment—was the US payrolls report which missed badly. On top of that, the unemployment rate rose; it was supposed to remain unchanged. And worse, average hourly earnings growth disappointed. So while many on Wall Street keep on shouting—as they have for over six years—that the US economy is steadily recovering and growing, the truth, especially on Main Street, is the opposite:  the US economy has never fully recovered from the Great Recession and it’s still….fully seven years after coming out of this recession…..struggling to attain strong, organic growth.

Finally, the picture that technical analysis is painting has just become more ominous….for the S&P500. While last week we pointed out that the S&P has essentially gone nowhere for the last two full years, after last week’s loss, the short-term picture has now become more worrisome. After topping in August, about two months ago, the S&P500 has now been creeping downward slowly but surely ever since. And if it fails to hold at its September lows (roughly around 2,120) then there’s a lot more downside immediately ahead of it.  The next level of support will come into play at roughly 2,000. So because this support level of 2,120 is not that far away from Friday’s close, and if it doesn’t hold, then we’d be looking at roughly a 6% loss from there if 2,000 is reached.

Sure that’s not a huge loss in the long-term history of this index, but over the last couple of years—when the Fed’s support of the US equity markets has become so dominant in levitating stock prices—such a loss would hurt the psyche of many traders who have come to believe that even such minor losses are no longer very possible outcomes in US equity markets.

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