Despite some notable daily sell-offs, the S&P500 rallied at the end of the week, not only to erase all the earlier losses but also to finish the week higher than it did the previous week! While very small (only 0.2%), a gain is a gain, and the large cap index managed to close near another record high. Volume was modest and volatility, which did jump during the daily sell-offs, managed to slide back down to the super low levels it’s been enjoying for many months now. All in all, last week’s intra-week dip looks like it was nothing more than a false alarm.
Everyone seems to be returning to the two major themes that have worked for several years now—buy the dip in stocks and sell volatility to generate even more income. The music is still playing, so everyone is still dancing!
With respect to technical analysis, the S&P500 is back to being as over-stretched as it’s ever been in the recent past. On both the daily and weekly resolutions, the index is pushing through the upper Bollinger bands and therefore deviating from the 50 day moving average by a huge margin. For example, a simple reversion back to the 50 day moving average would mean the index wold have to lose about 2.5%. More importantly, a perfectly normal reversion to the 200 day moving average would mean that the price would have to drop over 6%….something most long-only investors are not expecting to happen anytime soon, especially those investors who are selling volatility, because they would get crushed if the index ever lost anywhere close to 6%.
In terms of US economic news, the results were mixed last week. The Chicago Fed national activity index beat expectations, and so did PMI composite flash. Durable goods orders beat consensus estimates, as did new home sales. On the negative side of the ledger, the Richmond Fed manufacturing survey missed. So did international trade in goods, as well as pending home sales and consumer sentiment. Once again, the US economy is still stuck in a slow-growth mode.
So as the party in the US stock market continues to rage on, defying almost all historically-informed measures that suggest it’s outrageously over-valued, most investors continue to believe that they have no choice but to continue to attend this party……because there is no good alternative to stocks……and because when, or if, the party ever ends, they believe they’ll have plenty of time to get out before any crash really hits them.