The S&P500 inched up a tiny 0.2% last week. Volume was light and volatility eased back even further toward 2017 lows, as measured by the VIX index.
It was a slow week in terms of US economic reports. While existing home sales, new home sales, and the FHFA house price index beat expectations, the PMI composite flash report and initial jobless claims both came in weaker than expected. Leading indicators only met expectations.
An interesting divergence is developing on the technical charts. On the weekly resolution, the S&P500 continues to push the upper limits of price ranges. For example, the closing price is still hugging the upper Bollinger band. And almost all other indicators on the weekly charts are screaming “full steam ahead”. But on the daily resolution, the MACD momentum indicator has turned bearish. Often, the daily MACD acts as an early warning indicator of an impending short-term pullback in prices. While prices are still above both the 50 and 200 day moving averages (both of which are in turn still sloping comfortably upwards), the upward momentum in prices—at least in the short term—has stalled.
At the same time, the extreme overvaluation of the S&P500 has not abated. For example, the aggregate price to sales ratio for the S&P is still about 100% above its 100 year historical average. The same goes for price to GDP. This clearly suggests that the S&P could fall by 50% and if it did, it would only come back down to levels consistent with long-term valuations. And since most markets, when they do correct meaningfully, undershoot the average, this means that the S&P500 today is ripe for a “correction” that far exceeds 50% from peak.
It’s critically important, therefore, that investors stay alert for any serious changes in the market psychology. Specifically, it will be critical to distinguish minor market dips (that can and should be bought) from something that is far more serious and severe…..which cannot be bought until the dust settles.