So what now? The S&P 500 index had its largest down week in 2 years, and the Euro Stoxx 50 index broke its 200 day moving average for the first time since late 2012. As Cam Hui points out, last week’s selling was in spite of relatively good news on the data front, not because of it:
A puzzling retreat
If I told you I had a crystal ball and told you the following facts last weekend:
- Earnings season will continue to be strong, with solid beat rates for both the top and bottom lines (Factset reports the SP 500 EPS beat rate was 74% and the revenue beat rate was 65%, well above the historical average);
- The growth outlook will continue to be positive, as the 1Q GDP report will beat expectations by a full 1%;
- The FOMC statement will come in roughly as expected and the yield curve will steepen somewhat, but interest rates remain stable;
- Non-Farm Payroll will miss expectations, but the closely watched participation rate ticks up and wage pressures remain benign;
- Chinese PMI will come in ahead of expectations; and
- There will be no new geopolitical shocks.
What would your expectations be for US equities? Would you have predicted that the SPX would crater by 2% on Thursday and continue to decline Friday?
Clearly, last week’s economic data was not a major reason for the decline. In fact, as with most data points (including earnings and macroeconomic data), the market generally reacts to the long-term trend on a long-term timeframe, while traders and journalists are generally trying to account for short-term market moves with one quarter’s figures.
This story runs both ways. What’s interesting about the growth recovery in the U.S. from 2009 to 2014 is that both macro data and earnings results for U.S. companies showed significant post-recession strength in 2010 and 2011, but economic growth and earnings growth both slowed in the 2012-2014 period. However, the stock market was much more volatile in 2010 and 2011 when compared to the low volatility rally from June 2012 to today. Multiple expansion has been a bigger factor in the past 2 years than underlying earnings growth.
Even though market participants are always thirsting for a new story or reason for why the markets move, oftentimes price itself is the catalyst. George Soros, one of the best traders of the past 50 years, termed this Reflexivity in his book, The Alchemy of Finance. Soros respected and used technicals quite frequently as a result of his view that psychology often trumped fundamentals, especially on shorter-term time frames (when we’re talking days or weeks, or even 3-6 months).
For example, take a look at the 20 year weekly chart of Germany’s DAX index, with the 50 week moving average in pink:
Historically, breaks of the 50 week moving average in either direction have generally been quite significant markers of a potential long-term trend change. There are exceptions here, but the big trends of the past 20 years have generally stayed on the right side of the 50 week ma throughout the move.
Last week’s price action resulted in a break of the 50 week ma for the first time since June 2012, though the breach is only minor. A recovery back above 9350 over the next 2 weeks would change the picture quite a bit. But if the DAX remains below the 50 week ma, then the highs near the 8000 level from both 2000 and 2007 would be the spot to watch for longer-term support.
I bring the DAX up because the fundamental backdrop for Germany looks quite strong at the moment. The headline reason given for the decline has been the tensions with Russia and the future impact on German corporations (as indicated by Adidas and Siemens last week). But those tensions and potential sanctions were evident in the spring as well, and the 50 week ma held. The technical break this time could be an indication that investors are more worried about the over-arching geopolitical and economic concerns, or simply that positioning was finally so one-sided that aggressive sellers had to accept lower prices, whatever the news.
As for the U.S. market, the 50 week ma in the S&P 500 index remains 5% away:
As usual, headlines are more focused on problems in Europe, partly because prices in Europe have moved lower more rapidly. As we saw last week, the headlines can quickly turn from positive to negative simply because the screens show red, whatever the actual data may be.