Despite the eye-popping volatility seen in markets, the technical outlook remains unchanged: expect markets to remain in a very choppy trading range well into 2Q as part of broader bottoming pattern for the S&P 500 Index. In this space last Friday, I highlighted the likelihood of a high risk rebound based on deeply oversold short-term trading indicators and because a variety of internal indicators were already showing signs of coming off peak levels.
For example, NYSE downside volume peaked on Friday March 12 with a secondary, lower high on Wednesday March 18, while NYSE 52-week lows peaked on Friday March 13th as did the Put-Call ratios. The ARMS trading index peaked on Monday March 16 and the VIX peaked on March 18th.
What we’ve seen is a market rally to resistance at the 200-week moving average. I wasn’t expecting a 20% bounce in three days but stocks have done so into heavy technical resistance at its 200-week simple moving average, coinciding with a Fibonacci 38% retracement of the Q1 decline. Again, equities are likely trade in a very broad, choppy trading range well into, and possibly through April, and could see a significant retracement of the past week’s bounce.
How far could markets pullback? There is no one set playbook, but a retracement of 50-62% of the recent surge would not be surprising in the least, taking the S&P back toward a band of support between 2360-2410.
Remember, market bottoms are a process. The data points above signal to me that the extreme selling pressure and market structure stress that developed in March is likely subsiding and an internal low has developed. What does that mean for investors? Most major cycle lows in the past have developed over weeks and months beginning with a peak in selling intensity followed by secondary price lows in the indices that can be at higher or lower levels.
While it’s premature to conclude the final lows are in for the market, a bottoming process has likely begun, and we expect to see more positive divergences developing into late April and mid 2Q consistent with a bottom developing for our intermediate-term/ weekly momentum indicators. “V” bottoms are rare, with Q4 2018 the one example I am aware of following a major decline greater than 20%.
The vast majority of cycle lows have taken 6-weeks to 2-4 months, which is what I am expecting heading into 2Q. What should investors be looking for? Positive divergences often begin to develop at the group level during a broader bottoming process. One cyclical group, showing encouraging signs of improving is semiconductors, which are again showing evidence of being a potential leadership areas into 2H20.
Figure: Weekly Sector Review
Source: FS Insight, Factset
Figure: Best and worst performance sectors over past 3 months
