The S&P500 gave back over 1.4% last week. While not a huge loss by any historical standard, this drop was the largest of the year, so far. This demonstrates how narrow the trading range for the S&P has been for so many months; a relatively benign drop of 1.4% makes big headlines. Volume did not spike, however. This suggests that most everyone was not heading for the exits. And while VIX did jump, it moved from a record low sub-10 reading to a still historically benign mid-15 reading by Friday’s close; this implies that true market fear did not materialize among investors and traders. So volume and fear measures suggest that this drop was only a dip.
But what about technical analysis? On the daily charts, the loss of momentum that started several weeks ago, is now very pronounced and the latest price drop is clearly visible as ongoing market weakness. Also the closing price on Friday was just below the 50 day moving average. So there’s some cause for concern on the daily charts—more selling would not be unexpected. That said, on the weekly charts, the recent sell-off is barely visible. While prices are testing the 50 day moving average, both the 50 day and the 200 day are still solidly sloping upwards. And prices are far above the 200 day. So the technicals point to short-term weakness, but with longer-term strength still in place.
Internals are more concerning. While prices are still not too far from all-time highs, several important measures of the US stock market internals have deteriorated notably. For example, New Highs minus New Lows has gone negative for the first time this year. The McClellan Oscillator has dropped to its lowest reading since January 2016. The same is true for the percent of stocks above the 150 day moving average. So the market internals are sounding a more serious alarm. This doesn’t mean that more substantial selling is about to hit US equity markets. But is does mean that investors can’t automatically assume…as they have for many years now….that last week’s drop is simply just another “dip” that should be bought aggressively.