While not a massive drop, last week’s 1.44% fall in the S&P500 was the largest….in percentage terms….in many months. Volume was on the lighter side, but volatility did jump—the VIX index rose to the highest levels of the year. That said, there was still not signs of panic, which would require the VIX to jump well over 20. The last time we’ve the VIX over 20 was around election day in November 2016.
Last week was quiet in terms of the number of economic reports that were released. On the positive side of the ledger, the current account wasn’t as bad as forecast. New home sales beat consensus estimates, and headline durable goods orders beat expectations slightly. On the negative side, the FHFA house price index missed badly…coming in well below expectations. Existing home sales also missed. Initial jobless claims were much higher than expected. Durable goods orders excluding the volatile transportation component were far lower than predicted, and finally, PMI composite flash also missed.
Technical analysis, after last week’s loss, is suggesting that the S&P500 is on the verge of a breakdown. At Friday’s close, it came back down to the 50 day moving average, which means that for the Trump rally to continue, it would need to bounce off this support level and continue to move higher from there.
The problem with this test is that after Friday’s close, the Trump administration announced that at least for now, it would give up on repealing and replacing Obamacare. This means that one of Trump’s key election promises failed to become reality due to the inability to get all Republican legislators on board. So naturally, everyone will now ask this simple question—if repealing and replacing Obamacare failed miserably, how can we expect the other major promises to come to fruition, especially the promise about lowering corporate and individual tax rates? And if these two pledges also fail to become reality, then most of the reason for the Trump rally, the rally that began the day after Trump was elected, could disappear.
So US stock investors must suddenly worry about giving up major gains and must decide if they should ride out the probably drop…and perhaps buy more stocks on the “dip”…..or if they should sell now….to lock in gains….and wait for another day to re-enter the market.
Not an easy decision to make!