The S&P500 lost 0.38% last week on slightly higher volume. Volatility, as measured by the VIX index, closed higher on the week.
US macro news flow was light. The Empire State manufacturing index missed expectations—badly, by falling when it was projected to rise. Housing starts also missed. On the other hand, the housing market index, industrial production and the Philly Fed survey all beat consensus expectations. And initial jobless claims continued to hover near multi-decade lows.
The technical picture got uglier last week, not so much because of the modest weekly drop, but more because of the one-day panic sell off that approached two percent. While two percent, on the surface, shouldn’t be such a big deal, it did become a big deal last week because the S&P500 hadn’t had such a large drop in many months. In other words, investors had grown accustomed to unusually minor day-to-day variations in the S&P, so when a slightly larger sell-off occurred, a lot of investors got caught off guard.
More importantly, many investors got re-acquainted with risk, specifically risk to the downside in US equity prices.
With the big one-day sell-off (and despite the fact that a great deal of the one-day loss had been recouped by week’s end), many technical indicators suddenly grew more bearish. Most momentum indicators got pushed downward, and if they were already pointing down, they became even more bearish. Also, the 50 day moving average was not only broken, but the average itself stopped sloping upwards.
That said, this is still a relatively short-term moving average. Longer, and arguably more important moving averages such as the 200 day, are still solidly sloping upward…..and prices never even came close to falling below it.
So all in all, last week’s price action suggests that beneath the calm surface, the US equity markets are fragile and susceptible to sudden and meaningful drops….at least on a short term basis.