The S&P 500 bounced almost exactly 2% last week. Volume was modest, so once again this rebound was not the beginning of a new wave of big buying. But volatility did fall back quite a bit; the VIX index dropped into the upper teens, which is approaching…but not quite reaching…the levels associated with very high complacency. For this condition to return (the condition that described most of the 2017 year), the VIX would have to fall back closer to 10.
In US macro news, consumer prices came in just about as expected; but producer prices were a bit hotter than consensus estimates. Wholesale trade was a bit weaker than predicted. Initial jobless claims also missed, coming in a little worse than predicted. Also, consumer sentiment and job openings both missed. And the Fed’s balance sheet shrank by about 2 billion dollars…not a lot, but a reduction nonetheless.
The technical picture, in the shorter term, has diverged somewhat. On the one hand, the weekly charts are still painting a somewhat bearish picture for the S&P 500. Among many momentum indicators, the MACD is now solidly bearish because the fast line is not only below the slow line but it’s the gap between them is still expanding. On the other hand, the daily charts have turned bullish—the MACD indicator has turned up and is suggesting that last week’s bounce has more room to run.
Most importantly, our Simple Rule indicator….which is based on a time frame that’s longer than the weekly time frame….is now solidly indicating that investors should remain long in the S&P500. This Simple Rule does take into consideration the portion of the typical 5-10 year cycle that the US stock markets are experiencing (eg. early, mid and late) so even though the S&P500 is in the late stage of its multi-year expansion, last week’s 2% gain ensured that this indicator would remain bullish, at least for the upcoming week.