S&P500 Resumes Climbing?

The S&P500 jumped over 2.4% last week. Trading volume was light, so this was not the result of a rush of new buyers or money pouring into the market. But volatility continued to back down; last week the VIX index reached a 12 handle, meaning that S&P volatility has retreated almost back to the low levels investors enjoyed for most of 2017.

In US macro news, the big story of the week was US inflation….or lack thereof. Almost all the results (consumer inflation, producer inflation, month-over-month results, and year-over-year results) missed to the downside. This suggests that the Fed is not behind in raising interest rates to curb growing inflation threats. So the Fed has less pressure to raise rates more frequently. And fewer rate increases help investors feel more comfortable buying and owning stocks…..so these inflation results helped push the US stock markets higher last week.

Also, in the background, the Fed’s balance sheet actually grew a bit ($2 billion) last week, instead of shrinking as it has over previous weeks; this also helps to support US equity valuations.

Finally, the technical picture has changed on the daily charts. With last week’s gain. the descending triangle, which is normally bearish, has been broken. This means that many traders who were wary of betting on the long side will now feel more confident building their long positions…..or at the very least, reducing their short positions. This development, again on the daily charts, suggests that there may be even more gains in the next week or two. Also supporting the bullish argument is the fact that the 200 day moving average held—while it was tested for the third time this year, it has done its job and provided strong support each time.

But the weekly charts are still somewhat concerning. The damage done to the MACD has not been erased at all by last week’s gain. So the S&P will need another strong week or two to turn the weekly charts more thoroughly bullish.

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