Markets arguably are growing closer to tradable lows in this orderly and concentrated decline. I continue to view this selloff as a cyclical correction within an ongoing secular bull market that should resume its upward ascent after bottoming in March. At present, trends are down, and it will take time to be able to form attractive setups and achieve some base-building following this recent damage. Tuesday’s breach of January lows by Equal-weighted S&P 500 and DJIA likely postpones an immediate bottom until Friday, or early next week. However, it’s expected that lows to this selloff could be achieved within the next two weeks from a timing perspective and potentially as early as Friday. If this breakdown in the Equal-weighted SPX helps the “fear factor” rise further with a capitulatory reading in TRIN (Arms index) or a 1.0 or higher reading in Equity Put/call ratio, this should be helpful towards being able to buy dips with more conviction in this downtrend. At present, it will be helpful to watch for evidence of downtrend lines being broken, which might give some optimism from a structural perspective of a bottom that is currently lacking. Overall, we’re growing closer.
Positive factors:
-Market breadth remains well above 1/13/25. (mid-January lows.)
–High yield spreads are only gradually rising but have not reached peaks seen last August. Demand seems to be ongoing given Treasury yields having dropped in recent weeks and default rates are not going up meaningfully.
–Sentiment is about as bearish as I can remember on the retail level. AAII Bears last hit these levels in 2009 and 2022 at bear market lows. CNN’s Fear and Greed Poll Shows “Extreme Fear.”
-The Elliott-Wave structure seems to suggest that markets are close to bottoming.
–Daily RSI levels are finally reaching oversold territory.
–VIX term structure now shows Spot VIX to be 7 percentage points above the 3-month VIX futures. This is encouraging and normally this backwardation signals a coming market low.
–Technically despite Technology having worsened to 2025’s largest decliner percentage wise – YTD – 7.3% in Equal-weighted RSPT through 3/1025, many of these stocks are at or near long-term uptrends and still look very good technically.
Seasonality and cycles argue for a March bottom and rally into June. This period has directly coincided with the traditional early-year seasonality in the first terms of post-election years when a new administration takes over.
A couple of non-technical reasons:
Technology is still expected to remain the largest profit driver in 2025 – Earnings expectations have come down only partially after lavish AI spending in 2024 but are nowhere near collapsing. InfoTech (IT) has 4th smallest downside revisions in SPX. Profit growth estimates have “only” come down from 26.5% to 25.83%. (Bloomberg Intelligence.)
Valuations have improved dramatically– Half of the S&P 500 is now trading cheaper than their long-term average. NASDAQ 100 has slipped below the average of its Five-year Mean. (Bloomberg Intelligence.)
DJIA- Dow Jones Industrial Average
Dow Industrials SPDR – DIA
However, the following are problematic to the idea of an immediate bottom:
Technology, Financials, Consumer Discretionary, and Industrials all just broke January lows in the last two days of trading.
-Lack of capitulation.
-No Excessive Equity Put/call readings.
-No TRIN readings (Arms index) above 2.5.
-No true oversold readings on daily, weekly, or monthly charts (Note: Daily has just gotten to levels commonly thought of as oversold.)
-Equal-weighted SPX and DJIA have just violated January lows (This might result in the decline broadening out a bit in the short run before bottoming.)
Industrials, along with Financials and Discretionary, have just broken January lows
The act of breaking January lows might not seem important by many, but it’s a temporary negative structurally for markets that should be nearing trading lows in the indices.
While Technology and Financials largely bore the brunt of the selling lately, it’s gotten a bit more broad-based over the last day.
Note, intermediate-term uptrends are still very much intact for Industrials and Financials. Yet for this week, some act of recouping this support violation is thought to be important for the sectors that broke down under January lows this week.
Invesco S&P 500 Equal Weight Industrial Portfolio
VIX has not yet shown evidence of reversing
The CBOE Volatility index, or VIX, managed to close yesterday at the highest levels since last fall, with its Monday close at 27.86.
I mentioned that Spot VIX has now reached levels of backwardation vs. the 3-month VIX futures that normally can bring about some signs of stabilization in market indices.
However, VIX has not yet shown evidence of any breakdown, which often happens right before a stock market bottom. Furthermore, technically speaking, VIX currently shows no evidence of TD Sell Setup or TD Countdown exhaustion based on DeMark indicators, which looks to require at least 6 more days potentially, while the 240-minute charts (4-hour bars, not shown) could be in place by Friday.
Overall, I sense that since Equal-weighted SPX broke January lows today on a close, this might result in yet another Equity index pullback to new lows for SPX which would send the VIX likely temporarily higher.
The bottom line is that until there is evidence of VIX reversing (which might happen as of Friday or into next week), it still looks possible to see VIX trade into the 30s, and implied volatility might increase a bit more.
CBOE Volatility Index – VIX
