Dead Cat Bounce in US Stock Markets?

Last week, the S&P500 jumped by an impressive 2%. Unfortunately for the bulls, volume was very light, meaning that there wasn’t a lot of conviction behind this buying. Also bad for the bulls, volatility did not retreat; instead, the VIX index moved higher for the week.

In US macro news, the results were mixed. The Chicago Fed national activity index, pending home sales, initial jobless claims, and 4th quarter GDP results all beat expectations. On the other hand, the Dallas Fed manufacturing survey, consumer confidence, the Richmond Fed manufacturing survey, international trade in goods, and the Chicago PMI all missed their respective expectations. Once again, the US economy is stuck in a low-growth mode.

The technical picture is now becoming extremely interesting. Why? Because last week’s bounce, even though it was an impressive 2%, did very little to repair the technical damage done over the last 6+ weeks. In fact, the S&P500 still looks quite vulnerable to a test of the 200 day moving average….something that’s not been violated for just about two full years. If this happens (ie. the S&P falls through and closes below the 200 day moving average), then there will be quite a lot of additional pressure in the market for stock owners to sell more shares.

All that said, our Simple Rule….at the end of March….has not been violated. So as of March 31 2018, we’re still remaining long the S&P500 index.

But over the next few weeks, we’ll see if this recent bounce is merely a “dead cat bounce” and if the Simple Rule reverses its signal and tells us to exit the S&P for the first time in over two years.

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