Key Takeaways
- SPX bounce likely encounters strong resistance into May expiration and turns lower
- Bank of America (BofA) bearishness means broader market pullback likely nearing a low
- VIX cycles look to peak in early June, which would line up with Equity lows.
This daily SPX chart puts our recent bounce into perspective and shows that SPX has some hurdles to overcome before being able to discuss a bottoming process being underway. Resistance lies at SPX-4080 up to 4155 and an Expiration bounce likely should find strong resistance directly overhead. This intersects prior February lows which should now become resistance along with the ongoing downtrend line connecting the last few peaks in price. It’s never wise to make too much of a bounce which has not achieved significant technical progress, particularly when no real capitulation has occurred, despite ongoing bearishness. Stay tuned.
Cash levels lining up at the highest levels in more than 20 years indicate 2022 selloff likely in its late stages
The first key takeaway from May 2022’s Bank of America (BofA) Fund Manager survey revolves around the levels of cash balances now being held in Assets under Management (AUM). As seen below, these have reached the highest levels since 2001, over 20 years ago.
This is a welcome poll result for the Bulls to digest, as it directly shows the level of bearishness being expressed by investors. While this type of survey doesn’t always translate into immediate buying opportunities, it does tend to happen near many prior intermediate-term lows. Thus, while markets can certainly still fall further, it suggests the risk/reward for being short on a 3–4-month basis is growing poor.
Note that the April 2020 and October 2016 spikes to over 5% Cash % of AUM along with December 2008 both occurred near meaningful intermediate-term market lows. One can say similar things about March 2001, September 2001 and March 2003.
However, it’s worth making the subtle point that markets bottomed in February 2016 and rallied more than 10% into August 2016 despite cash levels rising for eight more months. Furthermore, as the left-hand side shows also, it’s worth pointing out that July 2000 was near the peak of the 2000 bull market, which happened for the S&P back on March 24. Thus, while the first drawdown certainly caused fear to elevate and cash levels to rise, the market continued in its downtrend into March 2003. Thus, cash levels were persistently high throughout the January 2000-March 2003 bear market. Bottom line, I do feel sentiment is approaching a point where stocks bottom out, but ideally from a cyclical perspective, this happens into early June.
Crowded trade survey results – Short Treasuries, Long Commodities
The May Bank of America (BofA) Survey also presents some interesting results with regards to the big Overweights and Underweights for various asset classes. These extreme bullish or bearish results often represent areas that many feel have value from a contrarian perspective, leading some to take the opposite opinion as an attempt to fade the crowd.
Importantly, the two big Overweights in the most recent May survey highlight two areas which line up directly in areas I feel are susceptible to reversing course:
1) Short Treasuries- This seems like an area primed to reverse, as I’ve discussed in recent notes. Given reasons such as cycles, DeMark exhaustion and strong support near prior lows (TLT) or highs (TNX-near 2018 peaks), Treasuries should be bottoming and I expect yields to pull back sharply in the next 4-6 weeks into June.
2) Furthermore, Long Crude/Commodities was the largest area of conviction among Fund managers which also gives reason (from a contrarian perspective) to consider a possible upcoming change of trend. We’ve seen WTI Crude waver a bit since March, but not drop off meaningfully. (Under 98 would be bearish, but initially, movement under 108 is a big warning).
Importantly, both of the highest conviction ideas from the May BofA survey are ones that I feel likely will continue higher after just a minor pullback to correct overbought conditions. Both TNX and Crude could pull back into June/July, but it’s likely that the intermediate-term uptrend in both persists for 2022.
VIX cycle composite shows an upcoming peak in June
Similar to other studies which show Equities bottoming in June, this cycle composite deals with the CBOE Volatility index, and argues that implied volatility might peak out in early June and fall into year-end. While this only includes two specific daily cycles that I’ve identified and might require further study, the initial results are impressive. The prior bottoms in 2018, 2019 and also late 2021 were all very impressive and coincided with lows in implied volatility.
The Fall 2020 bottom didn’t produce much of a low. Meanwhile the peaks in early 2018, 2019, 2020 and 2021 all had at least some rise in “vol” into these peaks, regardless of whether it proved to be the highest peak. The current year peak, as discussed, happens over the next 3-4 weeks on market weakness. Ideally, this sets up for a June bottom in risk assets, coinciding with Gann’s Mass Pressure index along with possible exhaustion in DeMark indicators (using my own interpretation) on further weakness on an absolute and relative basis over the next few weeks.
