The S&P 500 is in Correction: Analyzing Market Sentiment and Future Prospects

The S&P 500 Index (SPX) is stuck in a precarious position, as it has recently fallen through critical support levels that investors had hoped would hold firm. Notably, this index has breached its trading range established since last November. Presently, some tentative support is visible at this week’s lows near 5,525, with another potential floor appearing at last September’s lows, around the 5,400 mark. While oversold market conditions suggest that it might sound enticing to consider buying in, caveat emptor: being oversold does not equate to a buy signal. Instead, what we’re witnessing is a waiting game for confirmed buy signals, which have been rather elusive in this uncertain climate.

The Technical Landscape

It’s crucial for investors to understand that while oversold rallies can initially seem strong, they often wane once they hit the declining 20-day moving average, currently positioned at 5,900 and continuing to descend. This indicates an opportunity for a rally that could reach approximately 300 points, yet it certainly doesn’t guarantee a sustained rebound. One piece of evidence of an oversold situation can be found in the SPX trading significantly below the -4 modified Bollinger band (mBB). This could set the stage for a McMillan Volatility Band (MVB) buy signal, although that outcome remains uncertain. The SPX must first close above its -3 band, which would signal what is termed a classic buy. However, prudent traders should refrain from acting on this alone, as further price confirmations are required to justify any trading decisions.

Market Sentiment Indicators

Another key insight into current market sentiment lies in the equity-only put-call ratios, which are firmly signaling a sell for stocks. These ratios continue to rise steadily, indicating a bearish sentiment that will only change once they commence their descent. Market breadth is currently taking a beating, particularly “stocks only” breadth trailing significantly lower than New York Stock Exchange breadth. Both breadth oscillators remain entrenched in sell signals and deeply oversold territory, needing two or three consecutive days of positive breadth before they may roll over to buy signals.

A further alarm bell is the increasing number of new lows on the NYSE significantly outpacing new highs. New highs fell to a mere 11 on a recent Wednesday—the last time it was so sparse was back in April 2024, which coincided with a correction’s bottom. To overturn the existing sell signal, new highs must outnumber new lows for two consecutive days. It’s a tough market, folks, and it’s essential to remain both vigilant and skeptical.

The Volatility Index and Future Considerations

The Cboe Volatility Index (VIX) continues to trend higher, reinforcing the prevailing sell signal. Interestingly, however, a VIX “spike-peak” buy signal occurred on March 12, indicating a brief glimmer of hope. Though on March 11, the VIX hit a high of 29.57, closing more than 3 points lower the next day. Yet, similar attempts at generating a VIX spike-peak buy signal have recently faltered, highlighting the volatility in this market environment. The construction of volatility derivatives has taken a pronounced bearish turn lately, mirroring sentiments we saw during the chaotic market of March 2020.

The term structure of VIX futures currently slopes downward, further exemplifying this bearish sign for stocks. Alarmingly, the inversion in the two front-month VIX futures demonstrates an ongoing struggle: March futures trading significantly above April’s. Another oversold condition arises as the VIX trades well above the 3-month VIX (VIX3M), hinting that when it returns to normalcy below VIX3M, a short-term buying signal for stocks could materialize.

Conclusion

As of now, there is only one buy signal to take note of—the recent VIX spike peak—but it has struggled to gain momentum. The myriad of oversold conditions present in the market suggests that it is poised for a sharp but potentially short-lived rally back to that declining 20-day moving average, approximately 300 points above current levels. Investors should exercise caution, keep their emotions in check, and remain steadfast in their adherence to sound trading principles. The path ahead may be fraught with volatility, but those who patiently navigate these turbulent waters could potentially find opportunities that align with their conservative, traditional investment strategies.