Market Continues to Brush Off Cautious Sentiment

The recent momentum is showing no signs of slowing

Senior Vice President of Research
Mar 4, 2024 at 9:02 AM
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Last week brought a long list of economic reports, from data on inflation (core personal consumption expenditures (PCE) prices) to personal income and spending, inventory at the retail and wholesale levels, new home sales and the ISM Manufacturing Index. Moreover, earnings continued to flow at the individual company level. But by week's end, the S&P 500 Index (SPX -- 5,137.08) notched another new all-time high and its 16th weekly gain in the past 18 weeks.

Moreover, the rally is broadening, on the heels of technicians’ worries about narrow breadth. For example, small caps are participating, as measured by the Russell 2000 Index (RUT -- 2,076.39). The RUT moved to its highest level since April 2022, pushing above its year-end 2023 close at 2,027 and its late-December high at 2,066.

“…the Cboe Market Volatility Index (VIX - 14.71) came close to hinting at trouble ahead when it threatened to sustain a move through the January highs at 15.40, which is one half the 52-week high of 30.80. If the VIX moves through 15.40 again, I would view this as a caution signal for bulls, at least for the short term.

-Monday Morning Outlook, February 20, 2024

Despite the SPX’s mild pullback from the previous week’s high into Wednesday’s close, neither the CBOE Market Volatility Index (VIX -- 13.11) nor the price action in the SPX itself signaled trouble ahead.

For example, the VIX did not come close to moving above 14.71, a level that could hint at trouble ahead if taken out to the upside. That said, the VIX is sitting at trendline support using a series of higher lows since December 2023.

The last two times the VIX touched this trendline, Jan. 23 and Feb. 9, the advance off the trendline did not generate what might be viewed as “significant” selling in the context of the trend, but the SPX was lower one week later. You will see how the SPX behaved in the SPX chart that is below the VIX chart.

MMO 1 March

With the 30-day moving average currently at 4,922 and projected to be around 4,965-4,970 at this time next week, I see the area between 4,940 and 4,965 as a potential area of support in the event of a pullback and would view a close below the 30-day moving average as a potential signal that this momentum since late last year could be ending. As of now, the SPX is not signaling a loss of momentum, on the heels of the new all-time high achieved in Friday’s session.”

- Monday Morning Outlook, February 26, 2024

Even though there was a pullback from the previous Friday into the Wednesday close, the 30-day moving average, which has had importance since mid-October, didn’t come close to coming into play, suggesting momentum is still on the side of the bulls.

Currently, the SPX’s 30-day moving average is at 4,976 and moving higher at a rate of slightly more than 11 points per day. As such, it is projected to be around 5,035 at this time next week, 102 points, or 2%, above Friday’s close. As such, while a 2% move lower might be painful for a short-term trader that is mostly long stocks, such a move might provide an entry level for those seeking an entry point like mid-January.

110 points above the SPX close on Friday is the 5,247 level, which is a round 10% above the 2023 close. As such, this might be considered the next big level of potential resistance.

MMO 2 March

“Short covering on SPX component stocks is one aspect of relatively shallow pullbacks and fresh new highs on the index. We will get new short interest data as of mid-February shortly, which I should be able to report on in next week’s commentary.”

- Monday Morning Outlook, February 26, 2024

The most recent short interest data from the exchanges surprised me after we updated our SPX component only short interest graph to reflect data as of Feb. 15 that was released early last week.

Per the chart immediately below, short interest on SPX component stocks rose by 3.6% in the period from the end of January to mid-February. In the context of weak price action in the index amid a build in short interest, this could have bearish implications. However, the SPX rallied 3.8% during this short interest build. As such, with the SPX breaking out to new all-time highs, the build in short interest evident in the last report is bullish in its implications, as there is now more short covering potential as the SPX overcame a potential headwind.

MMO 3 March

As I implied in last week’s commentary, price is everything. If in the days ahead the SPX breaks below a support level, such as its 30-day moving average, then indicators like a short interest build on SPX components, or the VIX advancing from a key trendline and/or equity option buyers being at an optimistic extreme should carry more weight. But like last week and for now, momentum appears to be trumping potentially cautious readings on the sentiment front.

Finally, for those wondering, five-day open interest (OI) changes on the SPDR S&P 500 ETF Trust (SPY -- 512.85) indicated put buyers (bets on downside) returned. This is a topic I have covered for weeks. After a slightly call-heavy week two weeks ago, normalcy in this uptrend returned, with wrong-way bets against the SPY predominant. With the exception of the 514-strike calls, the heaviest OI builds were at the 506 strikes and below. This is a sign that there still is not a prevailing “sky is the limit” mentality that could precede a significant downturn.

MMO 4 March

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

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