Last week, we concluded in our technical analysis language that:
Last week’s gain the in the S&P500 was fully anticipated by the prior upturn in the daily technical indicators for this index. And with another week of gains in the books, the bullish pattern on the daily charts has become even more reinforced.
And in fact the bullish move in the S&P500 did continue. Last week, the S&P moved up a solid 1.5%. Volume was light to moderate, and volatility remained stuck near the lows of 2018; the VIX index closed near 12. However this is still notably higher than the lows enjoyed for most of 2017.
It was a quiet week for US economic reports. Factory orders, productivity gains, and consumer credit all disappointed. But PMI services, ISM services, international trade, and initial jobless claims all beat consensus expectations.
The Fed’s balance sheet continued to shrink. Since quantitative tightening began in October 2017, the balance sheet has diminished by 141 billion dollars….with a lot more reduction on the way later this year and next year.
In terms of technical analysis, last week’s bullish pattern on the daily charts has only been further reinforced. Unless something out-of-the-blue hits the US equity markets, the near-term outlook is again bullish. On the weekly charts, the damage from the February sell-off has now largely been repaired. For the first time since the winter months, the MACD has turned bullish on the S&P500. So the next big test on the weekly charts is to see if the old highs from January can be overtaken.
And finally, with respect to our Simple Rule, it’s no surprise that with last week’s additional gains, the bullish signal, the signal that had never been violated this year (despite the big sell-off earlier this year), remains in place. Remember, this is a signal to stay long the entire S&P500 index, not any one or group of selective stocks in the S&P.
Finally, there are a lot of cracks developing outside the world of US equities. Specifically, several important emerging market currencies are crashing. The Brazilian Real is falling close to a dangerous level of 4 to the US dollar. And many emerging market sovereign bonds are also crashing. All of this is related to the reduction of US dollars in global markets due primarily from the reduction of the Fed’s balance sheet, but also from the increasing supply of US Treasuries (to fund the Trump fiscal stimulus) that also absorb US dollars.
Financial historians are on a state of alert because almost all US financial market corrections were preceded by cracks in EM bond markets and FX markets. Soon we’ll know if the same is happening today.