After some up and down days during the week, by Friday’s close the S&P500 ended up almost 0.6% for the week. Volume was once again very light, meaning that investors were not rushing back into the stock market to buy the dip. Volatility, as measured by the VIX index, continued to climb back down from the recent highs reached in early February. That said, the VIX is still nowhere near the lows reached during much of 2017.
There was very little in the way of US macro news last week. PMI composite flash beat expectations, and so did initial jobless claims and leading indicators. On the downside, existing home sales missed badly, mostly due to the recent run up in interest rates.
With respect to technical analysis, the S&P500 shows no signs that the two-week bounce is over. In fact, the strong momentum generated off the 200 day moving average has pushed prices back above the 50 day moving average. That means that the “buy the dip” mentality and strategy, one that has worked so well for over a year now, may return. For this to happen, prices would need to fully recover their losses; they’d have to return back up to the all time highs set in late January and then go on to establish even higher highs.
If this doesn’t happen, then there could be a disastrous rush to sell….as everyone who looks to recover their losses starts to panic about incurring much larger losses than the relatively minor losses already incurred. In other words, after enjoying gains for several years, many investors will look to book the gains, and not risk losing them. The problem of course is that at these still elevated prices, there will not be enough buyers to get everyone out. So that means that only the first sellers, the earliest sellers, will have any chance at getting out at the higher prices. Everyone else, should a sell-off redevelop, will have to decide between realizing much lower price or staying put and riding out the retreat.
Meanwhile, one of the catalysts for the equity market sell-off, rising Treasury rates, is dissipating slightly. The US 10 year rate has backed down from almost 2.95% to the 2.88% level. While this is not a huge drop in yield, it does provide some more cover for the buy the dip strategy to return…..at least for a short while.