For the second week in a row, the S&P500 gained ground in an attempt to repair at least some of the massive damage suffered in October. This time the S&P rose 2.1%. But once again, volume was light so this gain had as much to do with short covering as it did with money returning to the US stock markets. That said, volatility dropped off, which is an encouraging sign because equity prices rarely continue to climb higher when the VIX index rises.
As usual, the US economic reports were mixed. ISM services and consumer sentiment both beat expectations. On the other hand, the JOLTS survey, consumer credit, and initial jobless claims all disappointed. One of the most surprising results was the producer price index for October—both headline and core prices surged way past consensus expectations. This hurts the US economy because producers will either have to raise prices to their customers (ie. US consumers) or they will eat the cost increase which will hurt corporate profits. So all eyes will be on the consumer price report which comes out later this week.
In terms of technical analysis, the two week rally has helped repair some of the damage on the daily charts. Prices have climbed back above the 200 day moving average. The next challenge will be to reach the 50 day moving average. On the other hand, the massive damage from October has now turned the slope of the 200 day moving average down. This will put a lot of technical traders on the defensive, as they look for evidence that market players begin to sell the rallies, instead of buying the dips—as they have for many years now. Also still bullish is the fact that the 50 day moving average is above the 200 day moving average. In other words, a death cross has not occurred. And while the weekly charts are still showing the ugly damage from the October sell-off, our Simple Rule…..as of last week….is still bullish. However, this upcoming week’s economic reports may easily reverse this signal.
So as of now, we remain cautiously constructive on the S&P500 index as a whole.