Mini-Crash in US Stock Markets

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.

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