The S&P 500 closed the first quarter 7% higher
The first quarter of 2023 is in the books. The major notes in the quarter included: the Fed continued to raise rates, hinting that more is to come relative to market participants’ expectations; sticky inflation data; and several bank failures. The S&P 500 Index (SPX – 4,109.31) finished the first quarter up 7% from its 2022 close, which may be a surprise to those focused on those headlines. However, the performance of this benchmark was thanks to a blistering start in January, as the SPX remains below its February peak.
“A bullish technical scenario would be the 200-day moving average being used as a launching pad for a sustained breakout above 3,970 that pushes the SPX above its since February trendline resistance, currently residing just above the round 4,000-millennium mark. Directional movement would be welcome, as 50% of the trading sessions from Feb. 24 to March 24 touched the 3,940 level... From a sentiment perspective, the bulls have working in their favor the potential unwinding of negative sentiment among equity option buyers on SPX component names.”
-Monday Morning Outlook, March 27, 2023
Per my observation on Twitter last Wednesday, the SPX pushed above resistance at 3,970 and 4,000, perhaps establishing at least some short-term direction after months of volatile, choppy, sideways action. Friday’s close, in fact, was a level the SPX touched in May, June, July, August, and September 2022 and again in February 2023, as it began its February through March pullback. This is a testament to the volatile environment since last May.
This is something to keep in mind as we move forward. On one hand, the strong rally from its 200-day moving average pushed the SPX back above the level that marked its trendline breakout in January at 3,970. Additionally, the SPX rallied sharply through the round 4,000-millennium mark, which was coincidentally the site of the trendline connecting lower highs since the equity benchmark’s peak in early February. Moreover, the SPX closed above its 320-day moving average on Friday, which is a long-term but unpopular trendline that sometimes is a meaningful pivot point. It was the site of the Feb. 2 closing high, in fact.
From a technical (and sentiment) perspective -- the sentiment aspect is what I will address later -- last week’s action looks and feels bullish. But one reality from a charting perspective is the SPX has become unstable since May 2022, after it gets “too far” above the 4,000-millennium mark, with two notable peaks at 4,160 (May/June 2022 and February 2023) and another major peak at 4,305 (August 2022).
As such, the 4,161 level lingers just overhead, which is around 10% above the December 2022 closing low and, as previously mentioned, marked the February peak. Also included in this mark is the 24-month moving average, which hit peaks in September 2022 and February 2023, is sitting at 4,250.
While potential resistance may lie just overhead, there is potential support at the 4,000-millennium mark, which is the level at which the short-term trendline breakout occurred last week. If this extended trendline acts as support on a pullback below 4,000, just as the 2022 trendline acted as support in mid-March, levels to key on this week range between 3,970 and 3,985.
If you want to make a bet on direction, the sentiment landscape will push you in the bullish direction. As I mentioned last week, the buy (to open) put/call volume ratio recently rolled over from a high level, and this usually coincides with bullish price action. In fact, the roll-over I pointed out last week preceded the technical breakouts mentioned above.
For what it is worth, in the weekly American Association of Individual Investors (AAII) survey, only 22% were reportedly bullish against the 45% that were bearish.
As such, continued unwinding of extreme pessimism in the options market, and/or fear of missing out among retail traders that were bearish ahead of the technical breakout, could be supportive of this market in the weeks ahead.
But proceed with caution in the event that past is prologue with respect to the SPX’s short forays above 4,000 the past 10 months.
Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.
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