Markets have begun the process of bottoming out and have carved out the first meaningful move off the lows since late last week on above-average breadth data. Despite FOMC lowering its Growth forecast and raising inflation data, Equities turned in their best “Fed Day” performance since 2022. Moreover, the combination of sentiment data turning fearful, followed by an above-average surge off last week’s lows, looks bullish for Equities in the months ahead. Overall, it looks right to position long with movement above 5703 on a close, leading to a meaningful rally back to new all-time highs. The downside should be limited to roughly 3%, while the upside back to new all-time highs should get underway to carry SPX up more than 9% initially.
Three factors looked most important this past week as to why Equities might be bottoming:
- Severe bearishness looked to have turned more capitulatory, with the Equity put/call ratio having neared 1.0 while VIX showed evidence of term structure inversion. Bank of America’s recent Global Portfolio Managers report illustrates some of the more negative retracements from US Equities in allocation of all time.
- Breadth gauges such as McClellan’s Summation index and SPX “Percentage stocks above 10 and 50-day moving average(m.a.)” failed to break down under January lows and have held up remarkably well despite the damage in SPX and QQQ.
- Advance/Decline surge off the lows on back-to-back days is a welcome development following the recent quick 10-15% decline in SPX and QQQ off recent all-time highs from February.
Overall, these are but a few of the important reasons to suggest why Equities should be in a window to bottom out in the near future or likely bottomed already last Thursday. Cycles, DeMark exhaustion, and oversold conditions also make a strong case that a low should be at hand precisely at a time when the sentiment seems to suggest the investing public might be waiting until more clarity on tariffs arises after April 2.
Bottom line, regardless of whether some backing and filling still might need to happen, or whether a push over SPX-5703 is imminent (which should lead back to new highs) the short answer is that further downside seems limited at current levels and the risk/reward for US Equities has grown quite attractive technically.
As shown below, SPX flirted briefly with my 5703 area before failing into end of day. For those keen on following trends, the ability to exceed 5703 on at least consecutive hourly closes should be sufficient to help trends begin to improve dramatically in the short run.
S&P 500 Index
Consecutive days of strong Advance/Decline data help to add confidence that a bottoming is underway
The combination of last Friday and this past Monday registering back-to-back 90% “Up” days, meaning that 90%+ of the total tradable SPX issues rose on the day, is a very positive development.
As shown below, the forward returns tend to be quite positive on a 3-month, 6-month, and 12-month basis when this happens.
While it might take a while longer before SPX and QQQ can surpass this past Monday’s peaks, this breadth expansion is seen as quite positive for US Equity markets.
Breadth thrust has pushed higher aggressively early this week
My Optuma breadth thrust chart showing the 10-day Exponential moving average of Advancing issues / (Advancing + Declining issues) shows a quick reversal from negative levels back to the border of positive (shown by 55 on the chart below).
I expect that SPX should be bottoming and likely will show some evidence of turning higher once this 10-day EMA gets back up above 55 (shown below). This should directly coincide with SPX getting back above 5703.
S&P 500 Index
March Bank of America Global Fund Manager Survey (FMS) shows ample reason for market optimism (from a contrarian perspective)
Interestingly enough, the most recent FMS showed the 2nd biggest drop in global growth expectations ever, the biggest drop in US Equity Allocation ever, the largest jump in cash allocations since March 2020. Yet the report also warns that FMS positioning is “nowhere near extreme bear levels.
Bottom line, this rapid retrenchment from US risk assets looks ill-timed in my view, and investors who are paying attention to how rapidly sentiment has been deteriorating should be sensing a good opportunity is approaching and/or has likely arrived.
It’s quite rare to see such negativity in broad-based fashion all at once when earnings, and the Economy largely remain in good shape. Chair Powell himself acknowledged as much, but failed to consider cutting rates Wednesday, and the Dot Plot remains largely the same with two cuts planned for 2025.
