SPY Chart, Investor Sentiment Echo November 2016 Stock Market

This time around, there's no imminent election to serve as a catalyst to push stocks higher

Senior Vice President of Research
Apr 23, 2018 at 8:42 AM
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"While last week had a positive tone, there is work to be done from a technical perspective...The SPX 2,700 and SPY $270 levels mark the mid-March 'Fed day' closes, when the Federal Open Market Committee (FOMC) raised rates. During the current rate-tightening cycle that began in December 2015, these Fed-day closing levels tend to act as resistance in the weeks following rate hikes."
-- Monday Morning Outlook, April 16, 2018

The stock market got off to an encouraging start last week, building on the prior week's gains, with the SPDR S&P 500 ETF Trust (SPY - 266.61) and S&P 500 Index (SPX - 2,670.14) briefly moving above resistance at their respective 2017 closes at $266.86 and 2,673.61. But lingering just above these year-to-date (YTD) breakeven levels was more resistance, stemming from both an options-related perspective (discussed last week) and the closing levels around the time of the March Federal Open Market Committee (FOMC) meeting, when the Fed raised rates.

As I have noted numerous times throughout the past several months, including last week's commentary and again on Twitter last Thursday, FOMC-day closing levels have proven to be a short-term "thorn in the side" for bulls in the immediate weeks after a rate hike.

spy one month after fed meetings

This pattern has played out as expected since the March meeting, with the SPY declining in the immediate aftermath of the March 21 meeting into the end of the first quarter. A new month and new quarter coincided with a double-bottom low in the SPY $255 zone, but the SPY met its match when the multi-tiered $270 resistance area came into play last Wednesday -- site of just-expired April expiration options resistance, its 80-day moving average, a 61.8% Fibonacci retracement of the March high/April low, and perhaps most importantly, its Fed-day close. Sellers stepped in just above $270, pushing the SPY barely back below its 2017 close by the end of the week.

spy ytd 80-day MA

Other notable equity benchmarks sold off late week from key resistance levels, too. For example, the Russell 2000 Index's (RUT - 1,564.12) high for the week was 1,592, just below the round-number 1,600 mark. This is also the site of a trendline connecting the January and March highs. Additionally, the 1,595 level is 10% above the July 2017 peak and a likely "profit-taking" zone for those who bought the September breakout above the July highs. The RUT is in a volatile chop between the 1,500 and 1,600 levels and comes into this week nearer to resistance than support.

rut daily six-month chart

Elsewhere, the Dow Jones Industrial Average (DJI - 24,462.94) found resistance around its 2017 close and just below the round 25,000 millennium mark. Finally, the Nasdaq Composite (IXIC - 7,146.13) peaked around 7,300 in what could be the makings of a "head and shoulders" top if the February closing low is subsequently breached at 6,777. There is fairly strong support for the IXIC, however, at its year-to-date breakeven mark that corresponds with the round 6,900 level. The 6,900 area acted as a floor on a closing basis earlier in the month. Its 200-day moving average is around 6,800, and has not been breached since the summer of 2016.

Keep these resistance (and support) levels in mind in the days and weeks ahead, as strong support below and bold resistance above may continue to contribute to an overall choppy environment going forward. Such an environment calls for either shortening your time frame or lengthening your time frame -- shorten it to take advantage of the quick, short-term movements that are apt to reverse, or lengthen typical holding periods to ride out the choppiness that might occur before the next major move.

Looking ahead to the next few weeks, market participants will continue to digest a slew of earnings reports, which have yet to give the market the significant boost that some were looking for. That said, the next FOMC meeting is scheduled for May 2, and the Fed is not expected to raise rates. The absence of a rate hike would be a slight positive for the bulls, as equities have clearly outperformed on the heels of the Fed staying pat relative to the immediate weeks following rate hikes.

"Fund managers' allocation to stocks is at an 18-month low and many believe the market has peaked or will peak this year, according to the latest Bank of America Fund Manager Survey...The allocation to global technology shares also fell sharply -- to a five-year low, according to the Bank of America Merrill Lynch Fund managers' monthly survey."
-- CNBC.com, April 17, 2018

On the sentiment front, one theme that caught my eye last week were the comparisons to the sentiment backdrop at present relative to the time around the November 2016 election, when the market was struggling with election-related uncertainty and negative sentiment was building. The comparisons got on my radar with a story on CNBC's website about the most recent monthly Bank of America fund manager survey that found the lowest equity allocations in 18 months. Per the charts immediately below, other sentiment indicators that we follow are also echoing the November 2016 time period, from newsletter advisor sentiment in the weekly Investors Intelligence survey to SPX component short interest, which is declining from 18-month highs.

II bulls minus bears with SPX

spx component short interest 0422

Also, for what it's worth, the pre-election Cboe Volatility Index (VIX - 16.88) closing high was 22.51, while the high in the past month registered at 24.87. As a side note, last week's VIX close at 16.88 was above the 2017 closing high of 16.04, which has proven to be a support area since late February. With many VIX call options expiring last week, a short-term risk for equity bulls is a VIX pop from support amid relatively low VIX call open interest.

And given the strikingly familiar sentiment backdrop, I couldn't help but notice the similarities in SPX price action at present, as well, relative to November 2016. Back then, the SPX was similarly making a series of lower highs over a multi-week period, but also finding support around its YTD breakeven mark and 200-day moving average. The catalyst for the unwinding of the build-up in negative sentiment was the removal of election uncertainty as investors bid stocks higher in anticipation of pro-growth Trump policies.

Now, a trade war looms that threatens growth and perhaps a flare-up in inflation. As such, it may take a perceived positive resolution on the North American Free Trade Agreement (NAFTA) negotiations, in addition to resolutions with Europe and other key trade partners, such as China, to move the SPX above resistance in the months ahead.

spy 200dma Apr-Dec 2016

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