After several weeks of massive selling, the S&P500 managed to bounce back a bit, during the holiday shortened week. The large cap index closed about 2.9% higher, but on very light volume so not much should be read into the meaning of this bounce. Naturally, as the selling subsided, the VIX index also backed off, ending the week in the mid-20’s.
Given the holidays at the end of the year, the number of US economic reports was light. On the bright side, the Chicago Fed national activity index beat expectations, as did initial jobless claims, the FHFA house price index, and the Chicago PMI result. On the downside, the Richmond Fed manufacturing index missed badly. Consumer confidence also missed, and pending home sales were a disaster. The Fed continued….without much press coverage….the unwinding of its balance sheet: as of the end of December, the Fed has shed 385 billion dollars in assets, since it began quantitative tightening back in October 2017.
With respect to technical analysis, last week’s modest bounce is barely visible on the weekly charts. In fact, the damage since the sell-off began (at the beginning of October) is so severe, that it would take many more weeks of 3% jumps to even begin to repair the current technical damage. What this means is that any minor bounces, such as the one registered last week, are perfectly normal bounces within larger bear market downturns…..and that traders who are bearish will simply look for such bounces (in fact, they will hope for such bounces) in order to get better, ie safer, entry points from which to short the stock market again.
In other words, many traders in the US stock markets have already abandoned the “buy the dip” strategy and have fully embraced the “sell the rally” strategy, a strategy that helps define the presence of a true bear market.
Meanwhile, the S&P500 in the month of December is on track for being the worst December since 1931. And for the year 2018, the S&P500 is on track for losing the most, in percentage terms, since 2008. Needless to say, there was no Santa Clause rally this year, and this left many experts on the wrong side of the market.
Finally, our Simple Rule has moved into a cautionary, or warning, zone, a zone that is very close to signaling for us to exit the S&P500 index, and move all proceeds to short term US Treasuries. As a reminder, our Simple Rule keeps us in the S&P500 over 80% of the time in most historical 10 year periods. So if this exit were to actually occur, it would be a highly unusual event. Hopefully, we’ll be able to make this call more definitively over the next couple of weeks.