The S&P500 closed the week essentially unchanged from the prior week, in which booked a notable loss, at least in percentage terms. Last week’s price action was still extremely volatile, with most days experiencing movements greater than 1%. While volatility, as measured by the VIX Index, inched down by Friday’s close, the VIX ended the week near 20, which represents one of the highest weekly closes of the year. Volume was moderate, which again suggests that most investors are not making major changes in their positions; in other words, investors did not pour new money into the S&P nor did they pull a lot of money out.
The week was busy in terms of US macro news. Month-over-month Retail sales missed badly—both the headline and the ex-autos figures disappointed. But at the same time, the year-over-year figure is still positive, and until this result turns negative, the US economy is very likely still growing. Industrial production beat expectations—both the monthly and the annual figures showed expansion. On the other hand, both housing starts and existing home sales missed; this looks to be the direct result of soaring interest rates and therefore soaring home mortgage rates. Finally, the Empire State manufacturing index and the Philly Fed business outlook both beat their respective estimates.
All in all, the US economy is not showing evidence that it has yet entered into a recession. Sure, the US is long overdue for an economic contraction, but as of now, it has yet to begin.
The technical picture is very mixed. The good news is that the 200 day moving average did it’s job—it provided the much needed form of support for the S&P500. While prices danced above and below this moving average over the last two weeks, by Friday’s close, the S&P settled just at this average. In other words, had prices ended the week notably below the 200 day moving average, a huge class of investors would have sound the bear market alarms and started to get out in much larger numbers. This didn’t happen.
The bad news is that the S&P did not bounce up from this same 200 day moving average, as it has over and over again for the last nine years. Sure it may still be too early to conclude that the bounce did not happen, but for this “buy-the-dip” strategy to work, prices must resume their climb this week, or by next week at the latest. If they don’t, then especially since everyone agrees that we’re in the very late stages of this market and economic cycle, many investors will start to head of the exits to prevent losing major profits that they’ve earned over the last nine years. And this of course would create a “doom loop” in which early selling would lead to further selling which in turn would lead to major market losses.
These next five to 10 trading days could determine the future of the current bull market.