Mini-Crash in US Stock Markets

March 26, 2018

The S&P500 fell almost 6% last week. This represents the largest percentage loss in the S&P since 2016. Volume crept higher, but the fact that it didn’t sky-rocket means that investors were not all rushing to get out at any cost. In other words, as bad as the loss was on a percentage basis, investors did not panic last week. Also supporting this argument was the movement in volatility. Yes the VIX index jumped, but it only reached the mid-20’s, which is nowhere near the level typically associated with panics. This level is usually well in excess of 30.

US macro news certainly did not trigger this selling. The news was mixed last week. The current account missed–the trade balance was worse than expected. Initial jobless claims were also a bit worse than predicted; that said, they’re still close to multi-decade lows. PMI composite flash came in below expectations. And so did new home sales. On the positive side, existing home sales beat consensus estimates. Leading indicators also came in stronger than expected. And so did durable goods orders, both headline and core results were better than estimated. Also of note, the Fed Balance sheet, which is published every week on Thursdays, decline by $6 billion; that’s not much of a drop, but it did decline….in a week where US stock market indices also declined.

From a technical analysis perspective, last week’s decline in the S&P was notable not only for its huge percentage loss (such large losses usually see technical follow-on selling), but for some of the barriers broken ….. and not broken.

For bears, the 50 day moving average was completely taken out. And not only did prices crash below the 50dma, but they plunged all the way down to the 200 day moving average… just 5 trading days.

So for the bulls, the 200 dma did its job—it provided much needed support on Friday at the close of trading. The S&P500 literally closed at the 200 dma and did not fall below it at any time during the week.

So now the clear and obvious test looms—will the 200 dma hold?  While some sort of bounce at this point would be perfectly normal to expect, it’s anyone’s guess as to what happens after that. And if the 200 dma is retested and does not hold, then there’s a huge air pocket of space beneath it. In other words, if the 200 dma is broken, then the S&P could fall a lot further before finding any sort of meaningful support. We’re talking another 7-8% (or roughly 200 S&P points) until some clear support could be found near the 2,200 level.

This upcoming week will be critical in determining what happens next, in the longer term, for the S&P500.

US Stock Decline Resumes

March 19, 2018

Last week, the S&P500’s recovery ended abruptly. Although the decline was not super large, it was large enough to reverse the prior bounce. The large cap index closed the week down 1.24%. Volume was modest, and volatility did not change much—the VIX index continued to hover around the mid-teens.

In macro economic news, the results were mixed. While core consumer inflation was hotter than expected, core producer inflation was lower than predicted. Retail sales missed; both headline and sales ex-autos disappointed. The Philly Fed survey also missed. Housing starts missed, and import prices were higher (ie. worse) than expected. On the bright side, business inventories grew more than anticipated; initial jobless claims were better than predicted. The Empire State manufacturing survey beat consensus estimates. Industrial production and consumer sentiment also beat their respective projections. So all in all, the US economy ….. as it has for many years now …. continues to limp along at very modest growth rates.

In terms of technical analysis, the S&P500 is still….despite this most recent decline (last week and last month) still extremely overstretched. The closing price last Friday remained above the 50 day moving average. The 200 day moving average, which is still way below the closing price, remains solidly upward sloping….which is a strong bullish indicator. And our Simply Rule is in no imminent danger of changing its signal; even with last week’s modest decline, the S&P500 is still in a bullish mode. The S&P would have to fall by about 5%…and remain there (or lower)….in order for our Simple Rule to switch to a bearish mode. That represents well over 100 points on the S&P.

The Recovery in the S&P500 Continues

March 12, 2018

Last week, the S&P500 soared over 3.5%, with the bulk of the gains coming on Friday when it rose almost 2% on that day alone. Volume, unfortunately, did not jump along with the price. That means that last week’s increase could still be explained in part by short-covering and the steady flow of corporate buybacks, buybacks that don’t vary too much from week to week. Volatility, however, did confirm the price action—the S&P VIX fell back to the low teens. And while this is a huge retreat from the panic highs over a month ago, it’s still not back to the complacent lows that dominated much of 2017. In other words, traders remain somewhat concerned about downside risk.

In US macro news, the dominant story was the strong payrolls report on Friday; this report also helped push the stock market indices higher. But as more jobs were created, the unemployment rate did creep higher and average hourly earnings disappointed.

Also disappointing were factory orders, productivity gains, consumer credit and initial jobless claims.

So despite the strong headline in payrolls, there are many other signals suggesting that the US economy continues to limp along with only tepid growth at best.

Finally, the technical picture remains mostly unchanged from last week. If anything, last week’s gains validated and strengthened the conclusion of our “Simple Rule”, namely that investors should remain bullish, and therefore net long the S&P500.

Just a Simple Rule

March 5, 2018

Unfortunately for the bulls, the S&P500 returned to it’s losing ways last week, when it gave up just a little over 2%. The problem for US equity bulls is that the bounce has not fully restored all the big losses incurred at the beginning of February, so that if stocks start to turn down again from current levels, many technicians will point to a failed, or “dead-cat” bounce and start to become more bearish going forward. But on the positive side, bulls can point to weak volumes—in other words, investors were not rushing to sell, and they can point to very mild rise in volatility, meaning investors were not showing any signs of panic during last week’s sell-off.

Meanwhile, on Main Street, the economic news was also disappointing. At least ten reports missed their respective consensus estimates. These misses included the Chicago Fed National Activity Index, new home sales, durable goods orders, international trade, the FHFA house price index, Chicago PMI, pending home sales, construction spending and the PMI manufacturing index. On the positive side, the Dallas Fed manufacturing survey, consumer confidence, personal income, and ISM manufacturing all beat their respective estimates. But the ratio of misses to beats was definitely in favor of the misses…..suggesting a slight slowdown in recent economic activity.

On a weekly chart, the recent turmoil in the S&P500 is still barely noticeable. This is indicative of just how big and powerful the upward move from the last 2-3 years has been. But on the daily charts, the most recent “correction” is most definitely visible. And as mentioned above, the S&P500 needs to resume its bounce very soon, or else a lot of recent stock market entrants will be among the first to rush for the exits. Why?  Because the joined the party late, they may not have enjoyed big gains that would naturally more than offset the recent paper losses. If instead, the entered the US stock markets—as many retail, or mom-and-pop investors did—sometime in 2017, then it wouldn’t take much more of a retreat to cause many of these recent entrants to be sitting on net losses. So from the desire to protect capital, these recent entrants could start to head for the exits first and in large numbers.

More importantly, wouldn’t it be nice if investors could take advantage of a simple signal to alert them to LEAVE the US stock markets if major losses, for example losses greater than 10%, were likely to hit their portfolios?  Assuming that most people would prefer—if they could—to avoid the massive ups and downs (over 50% losses in each of the past two bear markets) that we have witnessed in the S&P500 over the last 50+ years, one can develop simple rules that a) tell them to EXIT the US stock markets when bear markets are likely to occur, and b) tell them to ENTER, or REMAIN in, the US stock markets when these same markets are likely to rise.

Over the last several years, we’ve developed such a rule.  It’s optimized only for the S&P500 (not, for example, the NASDAQ or the Russell or any bond or commodity markets) and it keeps us in the S&P about 85% of the time.  Over the last 50+ years, it would have kept us out of every major bear market…missing not all of the losses, but the vast majority of each bear market’s losses.  More importantly, it would have captured the bulk of the gains in every bull market.  At major market turns, it’s slower to exit than to enter, so it’s biased to remaining invested….which is good because statistically, on most trading days, the S&P500 tends to rise, rather than decline.

As of Friday’s close, this indicator is bullish, meaning investors should remain in the S&P500.