Bulls Beware: Navigating a Volatile Stock Market

As we head further into 2025, market activity is reflecting significant uncertainty. What initially seemed to be a fleeting oversold rally in early April has evolved into a mixed bag of buying signals and cautionary trends. While the S&P 500 index (SPX) has edged higher, we shouldn’t let our guard down; volatility is brewing beneath the surface, and it could spell trouble for the unprepared investor.

The Current State of the S&P 500

At present, the SPX chart exhibits a bearish tone, which is paramount for investors to respect. The recent rally has managed to breach the downtrend line connecting February and March highs, a technical achievement that might appear encouraging. However, we are still faced with substantial resistance represented by the declining 200-day moving average, currently hovering around 5,750. A significant upward shift in market sentiment would only be confirmed if we see a close above 5,800. Until then, caution is advised.

Support Levels and Market Signals

Looking downward, support levels show that there is a gap down to 5,300 with spike lows at 5,100 and another critical level at 4,850. Notably, the April 30 GDP-related trading resulted in a spike low at 5,433, which could potentially offer short-term support. Despite some buy signals emerging, a McMillan Volatility Band buy signal appears imminent. According to the analysis, a close above 5,775 would be needed to confirm it.

Put-Call Ratios and Market Breadth

The equity-only put-call ratios are also trending positively, with both ratios peaking and then declining, reinforcing the buying signals detected. These signals are supported by computer-generated analyses that indicate strength, especially as they approach their chart highs. However, we must be vigilant as this bullish sentiment could flip if ratios surpass their recent peaks, triggering sell signals.

Market breadth indicators provide a mixed view; while breadth oscillators are on buy signals and in overbought territory, positive breadth remains contingent on the SPX’s upward movement. It requires at least two to three days of negative breadth for these oscillators to flip to sell signals, a scenario we need to keep a close eye on. Also, the New York Stock Exchange indicates that new highs barely outpace new lows, a situation that leaves us in a neutral state without clear direction.

Realized Volatility: A Cause for Concern?

One of the most alarming trends is the recent spike in realized volatility, which has now reached a staggering 50%. Generally, rising volatility correlates with increased danger in the markets, making prudent investors reconsider their positions. Despite this chaotic backdrop, bulls are seemingly undeterred—with the 20-day historical volatility remaining considerably high despite a decline in implied volatility.

The Cboe Volatility Index (VIX) has dipped below 25, continuing to indicate a volatile market environment. The “spike peak” buy signal issued on April 7 is still in play but will only last until next week. If VIX manages to close below its 200-day moving average for two consecutive trading days—a level just above 19—it would confirm a bearish trend.

Volatility Derivatives: A Bearish Construct

Another metric worth noting is the behavior of volatility derivatives. The term structures of VIX futures and Cboe volatility indices have maintained a downward slope throughout April, a stark contrast to what we would expect in bullish conditions. Even after a somewhat shaky rally, both the VIX futures term structure remains flat to down, indicating that optimism is severely lacking in the marketplace.

A Cautious Approach Moving Forward

To sum it all up, we must proceed with a cautious approach in the current market landscape. While some buy signals have emerged, the overarching bearish sentiment cannot be ignored. We are committed to maintaining an out-of-the-money “core” bearish position until the SPX chart signals otherwise. In tandem, we will trade based on confirmed signals while ensuring we are well-prepared to roll deeply in-the-money options.

In this market climate, prudence is the name of the game. Remember, investors who neglect the lurking risks in a volatile environment may find themselves caught off guard. Always keep your financial principles front and center, because, in the world of investing, knowledge is your best ally.