The S&P500 closed higher last week; it rose 1.5% which added to the gains from the prior week. As we noted in last week’s note, this gain was completely expected–it was a continuation of the bounce that began several weeks ago, and it was building on the positive technical signals that grew even stronger on both the daily and weekly charts.
On the downside, volume was extremely light, so by no means were investors rushing into the stock market with new money to buy more shares. In fact, all the evidence from analysis of funds flow suggests that the largest marginal buyer of US stocks over the last couple of years has been the corporate sector itself. Cheap money (cheap in large part due to the Fed’s stimulative monetary policies) acquired by corporations that sell bonds has been used by these same corporations to buy back their own shares. In the process, corporate debt to GDP ratios have reached all-time highs, highs that in the past have always been associated with the onset of credit crunches as the massive volumes of newly issued debt crash in price, leaving corporations to face much higher costs to re-finance this debt. This causes cash flows to suffer, and this in turn leads to corporate lay-offs and big reductions in capital spending.
But to be fair, this hasn’t happened yet.
In terms of US macro reports, last week’s news was neutral to negative. Headline inflation figures, both CPI and PPI, came in higher than expected. For wage earners, the higher CPI figure means that their real earnings are dropping, because their nominal wages are not keeping up with inflation. Job openings, in the JOLTS survey, also missed. On the positive side of the ledger, initial jobless claims were better than expected.
Now that the S&P500 has rallied for several weeks in a row, it’s time to look at the bigger technical picture. As noted last week, the weekly charts have now returned to being bullish, especially with the most important momentum indicators. That said, the S&P500 has still not returned to its highs of the year, highs reached in late January. Finally, our Simply Rule is still delivering a bullish signal, the same signal that it’s delivered all year—and in retrospect, properly so. This means that investors should remain long the basket of the entire S&P500; in other words, investors should continue to own S&P500 ETF’s such as the SPY.
At least for now.