Last Stand for the Bears

The S&P500 continued its remarkable early winter run. Last week it climbed another 1.6%, even after stumbling earlier in the week. Volume was moderate, and volatility slid further–the VIX index closed down into the teens, for the first time since early December.

Among the numerous economic reports released last week, the most important was the January payrolls report. On the one hand, many more jobs were created (304,000) compared to the number expected (158,000). On the other hand, the unemployment rate rose once again, this time up to 4.0%. And average hourly earnings missed expectations by a large amount—earnings rose only 0.1% (month over month) not the 0.3% predicted by economists. More importantly for us, the jobs report data confirmed the bearish signal that our Simple Rule generated last month. In other words, the data showed no signs that the bearish signal was about to be reversed.

So this sets up a dilemma. While our Simple Rule is signalling that investors should be out of the S&P500 index, as whole (not any one particular security), traders are still pointing to the 200 day moving average which, at Friday’s close, has still not been crossed from below. In other words, until this 200 day moving average is tested, the bulls will not have a strong argument for the continuation of this current bounce. It will take another 35 to 40 S&P points of gains for this test to take place. If the bears are correct, then this will be their last stand—the 200 day must act as firm resistance at which the S&P turns back down. If the bulls want to argue that the bull market has resumed, then the S&P will not only have to cross above the 200 day moving average, but it will have to stay above the 200 day and climb higher from there. In other words, the overhead resistance provided by the 200 day will have to be smashed.

 

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