S&P500 Bounces

After a fitful start to the week, the S&P500 closed on Friday to register an impressive 1.5% gain on the week. Volume was light, but this was pushed down in part due to the July 4th holiday on Wednesday. Supporting the bounce, the VIX index moved back down to the mid-12 levels. So volatility is now approaching the lows of the year; that said, the VIX is still almost 30% higher than the lows reached for much of the 2017 calendar year.

In US macro news, the ISM manufacturing index. factory orders, and ISM services all beat their respective consensus estimates. Construction spending, initial jobless claims, and ADP employment all missed. The big report of the week, June payrolls, was a mixed bag. The headline number of jobs created and the labor force participation rate beat their estimates; but the headline unemployment rate and average hourly earnings both missed. It’s important to remember that six months into 2018, that annualized hourly earnings at 2.7% are exceeded by annualized consumer price inflation at 2.8%. This means that in the first half of this year–fully nine years after the so-called recovery began in 2009–that real wage growth is actually negative. Unlike Wall Street investors, that is people with excess capital, capital that can be invested in stocks and bonds, most people on Main Street who do not have such capital are not only not benefiting from Wall Street’s gains, but they’re falling behind in incomes, because their inflation is eclipsing their wage gains.

Also, the Fed’s balance sheet just registered one of its largest weekly reductions since it initiated quantitative tightening—the balance sheet dropped by almost $16 billion, bringing the total shrinkage since October 2017 up close to $170 billion.

But the S&P500, so far seems to be ignoring the reduction in base money, which is not unusual because US equity investors back when the US stock markets first started eroding in late 2007 did not immediately respond to Fed easing either. They spent more than a full year falling, in the face of Fed easing.

With respect to technical analysis, this most recent bounce is impressive because it took place without even challenging the 200 day moving average. In other words, the big support that would normally be found at the 200dma was not needed to turn the most recent sell-off around. So now both the daily and the weekly charts are signalling that there may be some more upside ahead for the S&P500.

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