The S&P500 gave back about a quarter of a percentage point last week. The large cap index took a roller coaster ride, dropping several percent early in the week, but then roaring back on Friday to finish the week down….but only slightly. Volatility continued to drift lower—the VIX index edged downward a bit for the week. And volume was light to moderate; actually volume rose on down days, but fell off on Friday when the S&P jumped higher.
For US economic reports, the big story of the week was payrolls and the latest trend in labor costs. Both disappointed. Payrolls came in well below expectations, and several measures of wages (average hourly earnings, personal income and unit labor costs) all came in lower than predicted. This, perversely, helped the risk asset markets because investors concluded that disappointing wage growth would prevent the Fed from tightening as much as it had originally anticipated. And less Fed tightening leads to greater investor euphoria and hence higher stock prices.
That said, last week the Fed announced a larger than usual balance sheet reduction (16 billion dollars), so as of now, the Fed’s balance sheet has shriveled by about $100 billion from peak.
Finally, the big technical takeaway from last week’s price action had to do with the 200 day moving average. For the third time this year (once in early February, second time in late March, and third time last week), the S&P500 has tested the 200 day moving average. And so far, in all three cases, the S&P has successfully bounced off this moving average. In other words, this hugely important measure of support has held.
So on the one hand, this bodes well for the S&P. Since the 200 day has not been broken, some traders and investors may conclude that it will continue to hold so they should be more comfortable putting more money to work on the long side of the stock market.
On the other hand, the bad sign is that each successive bounce off the 200 day moving average has been weaker than the previous bounce. This creates a descending triangle formation and this type of formation is usually considered to be bearish.
Which direction the market will move should be more clear, in this situation, in about a month or two. This is not something that gets resolved in a few days or just a couple of weeks.