As expected, the S&P500 hit and reacted to resistance last week. The large cap index closed down a small amount, only 0.2%, but it was down nevertheless. Volume was moderate, and volatility was almost unchanged–the VIX index dipped a tiny bit by Friday’s close.
Due to the government shutdown, many important economic reports continue to be withheld; when they get released, we will return to them. Meanwhile, last week’s releases saw existing home sales miss consensus expectations. On the bright side, the FHFA house price index exceeded expectations, as did PMI composite flash and leading indicators.
In terms of technical analysis, our expectation that the S&P would hit resistance at or around the 50 and 200 day moving averages worked. As of Friday’s close, the S&P was slightly above the 50 day moving average, but it never quite reached the 200 day moving average. And since the 200 day moving average, in the eyes of most traders and investors, is a stronger technical indicator compared to the 50 day moving average, then the S&P500 can still rise some more this week or next before arriving at its ultimate test—the 200 day. But after the 200 day is hit….assuming that happens…..then the S&P500 must turn down if a new bear market cycle has arrived, as our Simple Rule has signaled (based on one of four critical economic tests) has happened already.
That said, it’s important to remember that our Simple Rule can generate a false signal. This happened in mid-2015, when it signaled that S&P500 investors should exit the index. But it took only six months for the Simple Rule to reverse itself and generate a re-entry signal, and as a result, the Simple Rule would have captured almost all of the in the S&P500 from early 2016 through the end of 2018.
So today, we are not only looking closely at the S&P500 to see how it reacts to the overhead resistance offered by the 200 day moving average, but we’re also looking for additional (delayed) economic reports to confirm our recent Simple Rule signal to exit the S&P500 index.