What November's Gains Changed on the Sentiment Front

SPX resistance levels have caused more short-term pauses than pivot reversals

Senior Vice President of Research
Dec 4, 2023 at 8:58 AM
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“…the SPX moved above a technical resistance level at 4,530 last week…the second potential level that I pointed out … came into play…That is, a potential trendline connecting the January 2022 peak with the peak in late-July…Just above potential trendline resistance is 4,589, or the July closing high…If sellers finally take control this week after four consecutive weeks of gains, the 10-day moving average could be a potential support level, as it was on multiple occasions during the March-July advance. It enters this week’s trading at 4,505 and continues to ascend sharply. ”

               -Monday Morning Outlook, November 27, 2023

For about six trading days, from Nov. 22 into month-end November, there was a suspension of the S&P 500 Index's (SPX--4,594.63) momentum as the benchmark traded sideways around resistance.

For example, in the graph below, a potential trendline connecting the SPX’s all-time high in January 2022 and the recent July peak continued to act as a lid for most of last week. On Wednesday, the SPX popped above this potential trendline intraday, but ultimately closed below it. In fact, Wednesday’s intraday peak was 4,587.64, just one point shy of the July closing high.

The SPX’s 10-day moving average played “catchup” as it came into play in Thursday’s trading. It was the site of Thursday’s intraday low before the SPX rallied late in the day, finally closing above the trendline it had struggled with in prior days. Friendly inflation data, combined with remarks from several central bankers, including voting members on the Federal Open Market Committee (FOMC) next year, indicated they are comfortable with where rates are at present, suggesting to market participants a peak in the rate hike cycle, though the central bankers retained their “data-dependent” rhetoric.

The Thursday-Friday rally from the 10-day moving average looks similar to early 2023, when it acted as support during a strong advance.

That said, I would not have seen a break below this moving average as a sell signal necessarily. Based on the SPX’s 20-day moving average daily rate of change, it will be around 4,550 at this time next week and could be supportive in the coming week if a pullback materializes. In fact, by mid-week, the 20-day moving average will be around 4,530, which I view as a key level; it is the August high and 10% above the October closing low.

Speaking of round percentage levels, however, note that SPX 4,606 now resides just overhead and is the site of the late-July intraday high before a correction into October. This level is exactly 20% above the SPX’s 2022 close. As such, a short-term risk is those that are thinking “breakeven” relative to the July peak using this rally as a “second chance” to lighten up on equity exposure. So far, resistance levels have proven to be areas of short-term pauses rather than pivot reversals, which the bulls welcome.

SPX 10-Day MA Dec

Turning to the sentiment side, one thing I have done in the past few weeks is focus on open interest changes on SPDR S&P 500 (SPY--459.10) options with a week or less until expiration, to gauge how short-term option speculators are viewing the direction of the market. In the past couple of weeks, it has been a, “what goes up must come down” mentality. This approach has not worked. 

As such, I focused on five-day open interest changes on options that expired this past Friday, Dec. 1. I found that there is still a huge number of short-term option buyers betting against the market’s momentum. If and when we see a shift, I think momentum may finally stall or shift to the downside.

SPY 5-day OI

Another chart that crossed my desk last week was short interest changes on SPX component stocks, updated as of mid-November. To my surprise, short interest on SPX components grew by 2%, implying that the first two weeks of the rally was not driven by short covering. In fact, per the chart below, shorts have been building positions for weeks, with total short interest on SPX component stocks at the highest level in the past year, even with the SPX up 13% year-over-year as of mid-November.

In a couple of weeks, we will get short interest data as of the end of November, at which time we can better understand what drove the market in the second half of November.

SPX Short Interest Dec

Even though we have found some skeptics amid the rally, there are buyers, but who are they? One group is active investment managers, per the weekly National Association of Active Investment Managers (NAAIM) survey. We have found this to be a fickle group from week to week, but bigger picture their average exposure has moved from a reading of 25% in late October to 81% as of last week, with a zero reading being 100% cash or hedged to market neutral) and 100% meaning fully invested.

From a sentiment perspective, the fact that this group is near, but not fully invested, could imply there is buying power left, albeit not nearly as much as there was going into November.

Equity option buyers have also become more optimistic, ramping up call buying relative to put buying after reaching a pessimistic extreme in September and October. The good news for bulls is that an optimistic extreme has not yet been reached, but like the NAAIM takeaway, there is not as much fire power to help drive the market from this group going into December relative to last month.

The unwinding of pessimism is driving this market in some areas, while others are still betting against it. With the technical backdrop favoring bulls, there is still the potential for higher stock prices into year-end.

But if there is a technical breakdown, keep in mind that the unwinding of fear that has sparked a “V” rally could quickly reverse itself.

SPX 10-Day PC Ratio

Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.

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