SPY is trading atop two key moving averages, while small-cap stocks will attempt to stage a decisive victory over bear-market territory
"… we also discussed the SPY's 36-month (three-year) moving average, currently situated around the 190 strike. As we move into this week's trading following an advance from the 2014-2015 lows (horizontal line in below graph), we are at an important juncture. A monthly close above this trendline would likely indicate that we are only in the throes of another correction, with a potential run to previous highs a strong possibility in the months ahead. But a close significantly below this moving average would likely indicate increasing risk that the 2014-2015 lows will be taken out."
-- Monday Morning Outlook, January 25, 2016
"… poor earnings, heightened volatility and turbulence in the market for low-rated corporate bonds remain, stoking concerns that the breather for stocks may be just a blip…. Adding to concerns is the pace of credit-rating downgrades hitting U.S. companies, which, according to Standard & Poor's Ratings Services, is at its highest since 2009… Volatility is also making traders uneasy. The S&P 500 this year has posted 23 daily moves of at least 1% and five of at least 2%, according to FactSet. It rose or fell 1% or more 12 times during the comparable period a year earlier and didn't have a 2% move."
-- The Wall Street Journal (subscription required), February 25, 2016
We enter the last trading day of February with the SPDR S&P 500 ETF Trust (SPY - 195.09) poised to experience another monthly close above its 36-month (three-year) moving average at $190.74, despite an "intra-month" move below this trendline for the second consecutive month. As we said in previous commentaries this year, a pretty effective tool for investors has been to monitor SPY monthly closes relative to this trendline to assess what lies ahead in coming months, as a way to determine risk versus reward in the stock market. It is nice to have a tool like this, especially during times of increasing volatility. And it is without a doubt that we are in a period of heightened daily volatility, per the excerpt above from The Wall Street Journal. Therefore, taking a step back and assessing the bigger picture can be advantageous during these times, and you can do this by observing longer-term charts.
In fact, note that in 2011, the 36-month moving average marked the SPY lows, when fears climaxed with a downgrade of U.S. debt. An interesting comparison to 2011 is present today, with one of many fears being the numerous credit rating downgrades of U.S. companies amid junk bond issuance plummeting. Just as fears of the U.S. credit rating downgrade proved overblown in 2011, five years later, fears of corporate bond downgrades may also prove to be overblown.

"Going into this week's trading … multiple indexes are simultaneously trading just above round-number levels. With sentiment still at a very negative extreme … bulls might find it encouraging that we enter this week above support from these round numbers ... as we observed the past couple of weeks, the price action in January/February continues to look very similar to that of August/September last year, when September marked a major short-term bottom. For example, SPY's 40-day moving average acted as resistance going into an eventual short-term double-bottom in September 2015 -- and this trendline acted as resistance again late last week, after another potential double-bottom occurred... if the broader similarities continue, and bulls can push SPY above resistance from its 40-day moving average, a potential target is $207 -- which is where it peaked just ahead of the sharp sell-off that began in late December. "
-- Monday Morning Outlook, February 22, 2016
Turning to a daily SPY chart, the January/February price action continues to mimic that of the August/September 2015 price action, which we anticipated as a possibility a few weeks ago. Last week, after a hesitation at its 40-day moving average the prior week, the SPY rallied above this short-term moving average. A crossover above this trendine in October last year signaled strong gains in the immediate weeks ahead.

Bulls hope that the current pattern we are seeing in the SPY continues into March, just as the rally from the double-bottom lows in September 2015 lasted into late October. If this occurs, we could see a rally up to the $207 area, as the extreme in pessimism we recently observed unwinds via short covering and sideline cash chasing equities higher.
In fact, the options market is signaling that pessimism has climaxed, as evidenced by last week's rollover in the 10-day, equity-only, buy-to-open put/call volume ratio from heights last seen in 2009 -- the bear-market lows. The chart immediately below depicts this rollover.

Moreover, with the release of short interest data last week that reflects short positions as of Feb. 12, we would suspect that when this report is released again in a couple of weeks, it will show short interest decreasing during the second half of the month. In fact, from mid-January to mid-February, short interest on S&P 500 Index (SPX - 1,948.05) components increased by 6.2%. During this period, the SPX traded between 1,830 and 1,930, implying the monthly surge occurred as the index was in the process of bottoming -- further suggesting that many of the shorts may be losing money.

"But with this market, there seems to always be a 'however.' So beware: The Russell 2000 Index (RUT) and Nasdaq Composite (COMP) are sitting below levels that represent 10% year-to-date declines -- 1,022 and 4,506, respectively. Therefore, this is an area where bears may attempt to use this rally to press their positions."
-- Monday Morning Outlook, February 22, 2016
The improving technical picture with respect to the SPY was accompanied by rallies through resistance at 1,022 on the Russell 2000 Index (RUT - 1,037.18) and 4,506 on the Nasdaq Composite (COMP - 4,590.47), moving the year-to-date percentage losses on these indexes from double digits to single digits. That said, the RUT enters this week's trading around another potential technical resistance level in the 1,036 area, which is 20% below its June 2015 closing high.
In other words, if RUT can sustain a move above 1,036, some market analysts will declare that it has clawed itself out of bear-market territory. This area marked a top at the beginning of February, so short-term sellers could emerge on this underperforming benchmark in the days ahead, with the index back in this area at month's end. As we've been saying for months, we prefer large-caps to small-caps, as the technical backdrop favors large-cap stocks.
Continue reading:
Indicator of the Week: The S&P Moving Average Bulls Shouldn't Ignore The Week Ahead: Payrolls Cap Busy Week of Jobs Data