“…there has not been a short-term technical breakdown in the SPX, which is still above the 5,000-millenium level as well as its 30-day moving average… The 30-day trendline is currently sitting at 5,060 and is projected to be at around the 5,100-century mark this time next week… .Last week, the VIX again flirted with the 15.40 level, which is half its 2023 high achieved just over one year ago. As of Friday’s close, the VIX is not signaling major weakness, but there are sentiment indicators such as those Senior Market Strategist Matthew Timpane mentioned last week that point to a heightened pullback risk... These sentiment indicators are noteworthy, but will carry more weight and meaning if the SPX breaks below support levels”
-Monday Morning Outlook, March 18, 2024
On the heels of stocks trading higher again last week and the S&P 500 Index (SPX —5,234.18) notching another all-time high, I am highlighting the importance of giving more weight to sentiment indicators when they are conflicting with price action, and less when sentiment is in line with price action.
So while many sentiment indicators we track showed optimism creeping into the market -- a necessary ingredient that foreshadows weakness -- it is not a sufficient condition for the onset of notable market weakness.
In other words, there must be a defined technical breakdown that suggests latecomers to the rally are feeling pain and therefore at risk of selling. As more and more latecomers to the party feel that pain, selling power eventually overcomes buying power and a short-term correction and/or a longer, sustained period of selling materializes.
Ahead of the scheduled Federal Open Market Committee (FOMC) meeting last week, neither the SPX nor the Cboe Market Volatility Index (VIX —13.63) indicated that sentiment risks were worth acting on, unless one wanted to hedge FOMC uncertainty with portfolio insurance being cheap relative to what it might cost in the event of a major negative surprise from the Fed.
“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.”
-Monday Morning Outlook, March 4, 2024
So where are we now, beyond the obvious all-time high? Per the chart below, the SPX is at a potential hesitation or pivot level. Due to the momentum, I’m more inclined to call this a potential hesitation point until I see evidence that the momentum off the late-October low is hinting at running out of steam, which I don’t see at this moment.
But it is no surprise, per an observation I made earlier this month, that the 5,250 area is where the SPX struggled late last week. My observation about the potential importance of this level hinged on the idea that anyone anchoring to the 2023 close may be tempted to take profits with the index exactly 10% above last year’s close, especially with the first quarter about to end.
Moreover, note in the chart below that as the SPX approached 5,250, the top rail of a channel in place since late last year and early this year came into play. The good news for bulls, if investors anchoring to the 2023 close are no longer relevant, is that the top rail of the channel moves higher with each passing day. At the end of this shortened trading week, the top rail of the SPX channel will be just above the round 5,300-century mark.
Anything can happen any given day or week with respect to equity and index price action. So with the potential resistance topic covered, what are the potential support levels as we head into the last week of trading in the first quarter of 2024?
The first level of support is the bottom rail of the channel, which comes into the week at 5,145 and ends at 5,170. A break of this channel would hint at a loss of momentum. But I see the 30-day moving average, which marked a mid-January low, as having importance too, even if there is a channel break. The 30-day moving average enters the week at 5,100 and is projected to be around 5,130-5,135 at week’s end.
“More importantly for investors, however, is how stocks have reacted to what might be viewed as bad news regarding investors factoring in numerous rate cuts in 2024 to changing their expectations of a much slower path to lower rates… It suggests to me that investors are placing more weight on the prospects for continued economic growth without the help of the Fed, even though the central bank continues to steal headlines. In fact, what is the appropriate level of the fed funds rate and what is perceived to be the appropriate level may well be two different animals.”
-Monday Morning Outlook, February 26, 2024
A potentially bullish signal for equities, after the VIX failed to overtake the important 15.40 level the week prior, is the VIX’s break below a trendline connecting higher lows since December. In past commentaries, I noted the SPX went sideways when the VIX retreated to this trendline and advanced higher for a short period. Now, we are moving into a period of potentially even lower volatility, which could have bullish implications for equities in the near term, if the VIX works its way down to at least the December 2023 low.
Beyond important levels, I have a general observation that is worth pondering again after circling back to an observation made in late February, as excerpted above.
The reason why stocks rallied last week was that the Fed continued to project three rate cuts by year’s end. Keep in mind, however, that in the one month leading into last week’s FOMC meeting and following a string of hotter-than-expected inflation data, Fed funds futures traders reduced the odds of the first rate cut occurring in June from 78% to 64%.
Despite the increased probability of rates being higher for longer, the SPX rallied 4% during that period. This is again relevant because it reinforces that investors are placing more weight on growth, and less weight on the need for a rate cut.
Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.
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