US Stock Markets on Auto-Pilot

Very little has changed for the US stock markets in the last week. As expected, again the S&P500 crept higher. This time it rose 0.85%, on moderate volume. Volatility eased back down–the VIX index dropped back into the 11 range. Interestingly, while the S&P 500 has now fully recovered its losses from the February sell-off, the VIX index has not returned all the way back down to the super-complacent levels it reached during much of 2017. So investors remain a bit more worried than the index prices may suggest.

In terms of recent US macro news, last week was a mixed bag. Housing starts, initial jobless claims and the Philly Fed business outlook survey were all better than expected. But the Empire State manufacturing survey, existing home sales, leading indicators and PMI composite flash all missed. So the US economy….especially with help from the recent Trump tax….continues to grind forward at moderate rates of growth. Most importantly for risk-asset investors, all the data are showing that the US economy is not in….or about to fall into….a recession, at least anytime soon.

And until a recession becomes a greater threat, most technical indicators—indicators that admittedly continue to show an overbought and overstretched S&P500—cannot be trusted to predict a major pullback in the near future. Instead, these indicators are likely to continue to remain stretched—or become even more stretched than they are today—as long as US economic growth does not grind to a halt.

Interestingly, the reduction in the Fed’s balance sheet has now (almost 12 months after it started in October 2017) has now hit $250 billion. And the greatest impact of this “quantitative tightening” has arguably affected emerging markets and other developed markets far more than it has affected US investment markets. Of course this may change since $250 billion is still only a small fraction of the total balance sheet expansion that the Fed engineered starting 10 years ago. But as of now, the tightening to date has not hurt US stock markets—or even the US high yield markets—very much, if at all. At least so far.

So our Simple Rule…..clearly in accordance with everything described above….continues to generate a bullish signal. And once again, this applies NOT to any individual stock in the S&P500, but to the total S&P500 index.


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