The S&P 500 continued eroding last week, but this time by a more meaningful 2% by Friday’s close. Volume inched higher; this meant that conviction in the selling was growing. And volatility also spiked….a lot….which meant that investors and traders were buying tons of insurance to protect themselves against even further losses. The VIX index jumped well above 20, after spending most of the last two months in the mid to low teens.
It was a busy week for US economic reports. On Monday, we learned that the Chicago PMI result came in far below expectations. Personal income also missed; at the same time, personal spending only met expectations. Construction spending missed. ADP employment missed. Initial jobless claims were worse than expected. ISM services also missed. On the positive side, ISM manufacturing beat expectations. Productivity came in stronger than expected. And in international trade, the US deficit was still bad, but not quite as bad as predicted. The big number of the week was payrolls, and it missed. Not by a lot, but it was still a miss. Headline unemployment was unchanged, as predicted……and so was the average workweek. Average hourly earnings were slightly better than expected. And unfortunately, the labor force participation rate went the wrong way—it dropped, meaning that a huge number of people left the workforce mainly due to poor employment prospects.
While we often make claims about the overall valuation of the US equity markets (they’re overvalued!), we rarely make claims about short-term timing of future price movement. Last week was one of those times, when we wrote:
The short-term topping pattern that began to take shape at the end of the summer has only been reinforced by last week’s modest loss in the S&P500. This topping pattern is now clearly visible not only on the daily charts, but also on the more important weekly charts. As valuations (based on price-to-earnings, price-to-sales, and price-to-normalized earnings) cling to the extremely high end of long-term historical ranges, the signals coming out of technical analysis become more important because they often provide some of the earliest warnings that prices are headed for a fall. And the signals coming from even the most basic interpretation of the price and momentum indicators is that the S&P500 is poised for a more meaningful retreat.
And last week’s 2% loss validates this short-term call.
But more importantly—what’s next? Well the most likely reaction to almost ten straight days of consecutive selling (a record that dates back to 1980!), is some sort of short-term bounce. Precisely because of the long streak of losing days, a bounce becomes a much more likely outcome in the next several days. Why? Because technically, the S&P is oversold on the daily charts, and a reversal would be perfectly normal to predict as the expected outcome over not only the next several days, but even over the next week or two.