The S&P500 dipped about half a percent last week, on very light volume. S&P volatility meanwhile, crept up…..as would be expected during a week when prices fell.
So does the slight pullback in prices change the technical picture? Not at all. On both the daily and the longer-term weekly charts, the S&P is extremely overstretched to the upside. It’s almost parabolic spurt—-starting the day after Trump won the election—-is still in effect.
The big economic news last week was the US payrolls report which showed a higher than anticipated increase in new jobs for the month of February. The downside of this report was the average hourly earnings figure, which disappointingly rose less than predicted. So more jobs, but less pay. In other economic news, wholesale trade, productivity, consumer credit and initial jobless claims all disappointed. On the positive side, only factory orders beat expectations.
So while the march higher in US equity prices continues, something more worrisome is happening in the global oil markets—the price of oil is collapsing, again. This is important because oil is not only a large industry in the economy but it also functions as a signal of overall economic activity, much like the price of copper. Since oil plunged about 9 percent last week, back down to levels first seen in late 2014, the concern is that the global economy can’t truly be doing very well….as least as well as advertised. Of course, higher supplies can contribute to a glut in oil inventory and hence a lower price, but if the world’s economies were doing well, they would absorb this extra supply with greater demand and at least maintain the price of oil, if not push it higher.
Meanwhile, the price of copper is also turning down lately.
And high yield bond prices are turning down.
At the same time, this week the Federal Reserve is almost 100% certain to raise interest rates, which would be the third increase in this latest hiking cycle, which started in late 2015.
Could the Fed be hitting the brakes just as the US economy is about to slow down anyway? If so, then the US stock market could get jolted and the Fed could be looking at a very short interest rate hiking cycle….one that stops and even gets reversed after only a handful of increases.