The Current State of the S&P 500: A Conservative Analysis

The S&P 500 Index (SPX) is in a precarious situation, showing signs of a correction as it has recently relinquished all established support levels. The market is facing a critical juncture, having dipped below a trading range maintained since last November. Presently, the index hovers near tentative support levels around 5,525, with additional potential support at last September’s lows of 5,400. While it’s evident that the U.S. market is oversold, we must clarify that ‘oversold’ does not necessarily equate to a buying opportunity.

Oversold conditions may prompt a short-term rally, but without confirmed buy signals, we would be wise to exercise caution. Historically, oversold rallies may initially gain traction but tend to fade upon reaching the declining 20-day moving average, currently located around 5,900, and on a rapid downward trajectory. If a rally does materialize, we could expect a 300-point bounce before it falters.

Current Market Analysis

One of the indicators tracking the oversold status of the market is the SPX’s performance alongside modified Bollinger Bands (mBB). The index is currently trading below the -4 sigma mBB, a situation that could potentially lead to a McMillan Volatility Band (MVB) buy signal, but such outcomes remain uncertain. To prompt a classic buy signal, SPX must decisively close above the -3 sigma band—an unlikely event given current market behavior. We advocate for additional price confirmations beyond these initial signals to validate any buying stance.

Put-Call Ratios and Market Breadth

The equity-only put-call ratios remain on steadfast sell signals, reflecting bearish sentiment as the ratios continue to rise. A genuine shift towards a buyer’s market would require these ratios to roll over and decline. Furthermore, market breadth has taken a significant hit; particularly alarming is the disparity between “stocks only” breadth and the broader New York Stock Exchange (NYSE) breadth. With both breadth oscillators firmly on sell signals and lurking in deeply oversold territory, we require a minimum of two or three days of positive breadth before we can sound the all-clear for buy signals.

Adding to this worrisome picture, the count of new lows on the NYSE continues to overshadow new highs—a clear sell signal right now. With just 11 new highs recorded on Wednesday, we are reminded of April 2024, a time when the market was similarly beleaguered. To shift this trend, it requires two consecutive days of new highs outpacing new lows.

Volatility Indicators: VIX Analysis

The Cboe Volatility Index (VIX) is also trending upwards, indicating persistent market uncertainty. The current climate shows VIX sell signals entrenched, though a recent spike-peak buy signal was indicated when VIX peaked at 29.57 on March 11 and then closed significantly lower on March 12. Despite these signals, earlier attempts for a VIX spike-peak buy signal have faltered as the index subsequently climbed above prior peaks.

The state of volatility derivatives has turned more bearish over the past couple of weeks—mirroring conditions we haven’t seen since the pandemic-induced market upheaval of March 2020. A downward-sloping term structure for VIX futures adds another layer of concern, particularly the inversion of front-month VIX futures, where March is trading approximately 1.30 points above April. Moreover, VIX trading remains well above the 3-month VIX (VIX3M), suggesting yet another oversold indicator, which could signal a short-term buy for stocks when the two normalize.

Conclusion: A Time for Vigilance

As it stands, we currently hold a solitary buy signal stemming from the VIX spike peak—an indicator that has trouble establishing momentum. With multiple oversold signals at play, investors could face the prospect of a sharp yet fleeting rally back up to the declining 20-day moving average, approximately 300 points above current levels. For prudent investors, there is little to be done at the moment but to observe this tumultuous market and prepare for any opportunities that align with fundamental financial principles.

In conclusion, this is not the time to throw caution to the wind. Conventional wisdom and historical data suggest that until clearer buy signals emerge, the conservative approach of maintaining a watchful stance is not just advisable—it’s imperative.