Even though the month of October was one of the worst for the S&P500 since the great recession, the S&P closed last week with a 2.4% gain. Volume during this up week was lower than it was in the previous week when prices fell substantially. This is not a good sign for bulls because it suggests that last week’s rise was in part based on short covering, profitable short covering, not on new money being put to work at depressed prices. Volatility, on the other hand, dropped off materially; this is a good sign for the bulls because it paves the way for investors who can add equity risk but only if the VIX shows signs of backing down, which it did last week.
In US macro news, personal income missed; so did the Case Shiller home price index. Chicago PMI also missed. And in one bad day (Thursday) alone, all six reports missed–the Challenger job cut report, initial jobless claims, productivity, PMI manufacturing, ISM manufacturing, and construction spending. But much of this bad news was eclipsed by the relatively strong October jobs report which recorded 250 thousand new jobs vs. the 190 thousand expected. Also in this report, we saw that average hourly earnings rose, on a year-over-year basis, faster than it had in several years—3.1%. The only downside to all the good news in the payrolls report is that it will force the Federal Reserve to raise interest rates more aggressively, to make sure that wage inflation doesn’t get out of hand; this could lead to general consumer inflation, which per the mandates of the Fed, must be strictly controlled. And this upward pressure on interest rates will put a brake on the bullish action in the US stock markets.
In terms of technical analysis, the S&P’s bounce now shows up as a bullish signal on the daily charts. This means that it’s very likely that traders will want to catch the continuation of this rebound, especially as the seasonally favorable end-of-the-year dynamics kick in (stocks tend to rally, on average in the last 45-60 days of every year). On the weekly charts, however, the technical damage from October was too severe to be fixed by one moderately strong week. So the weekly charts are still pointing to the probability of more selling in the intermediate term.
All that said, our Simple Rule is still bullish. Interestingly however, the technical component of our Simple Rule has flipped to being bearish. But until the fundamental economic component flips to being bearish—and through last Friday’s economic reports, it’s still showing that the US economy is expanding—the Simple Rule ignores the bearish technical signal…..and remains bullish on the S&P500 index.