Why Stocks Are Showing Signs of Weakness Similar to Pre-2022 Bear Market Conditions
As we navigate our way through the current market, it’s essential to stay alert to the indicators that paint a clearer picture of future movements in the stock market. Right now, we are witnessing similar conditions to those that presaged the onset of the bear market in 2022. Specifically, certain key market indicators are flashing cautionary signals that suggest a potential decline ahead for stocks.
Current State of the S&P 500 Index (SPX)
The S&P 500 Index, our primary benchmark for understanding market performance, has recently hit resistance at the 5,860 mark on several occasions—six times to be precise. At this point, this 5,860 area has transitioned into a formidable resistance zone. Meanwhile, the support levels between 5,670 and 5,770 appear to be in play, which marks the trading range that characterized late September into early October.
A critical threshold for the bulls lies at 5,670; a close below this level would signify a substantial negative shift in market sentiment, and we would be compelled to reassess our core bullish positions.
Volatility and Internal Indicators
While SPX hasn’t yet reached the +4
Adding to the complexity, the market breadth has experienced a distinct deterioration. This signals growing weakness as both breadth oscillators have also flipped to sell signals. It’s particularly notable that although new NYSE highs are outpacing new lows, trend lines are tightening—indicating potential fragility. If new lows were to eclipse new highs for two consecutive days, it would negate any bullish signals established since mid-August.
Interpreting VIX Signals
The VIX, often referred to as the market’s fear gauge, is presenting a conflicting read. On one hand, there’s a “spike peak” buy signal in play unless the VIX closes above 23.14. Conversely, a VIX sell signal is established, which would be invalidated by a close below the rising 200-day moving average, currently situated just below 15.50. As of Wednesday’s close, the VIX rested at 19.24—a concerning midpoint between these critical levels.
Despite the mixed signals, the construct of volatility derivatives is mainly bullish for stocks, showcasing upward sloping term structures in CBOE volatility indices and VIX futures following an increase in implied volatility post-election. The SPX options set to expire immediately after the U.S. elections on November 5 are particularly costly, akin to options on stocks prior to reporting earnings — a clear indication that traders anticipate volatility surrounding this imminent event.
What Lies Ahead
While some optimistic patterns may unfold as we approach seasonally favorable trading periods, we must tread carefully. For now, we are maintaining our core bullish stance as long as the SPX holds above 5,670. However, plans must be in place to pivot our positions should market conditions dictate, particularly if we witness a two-day close below this important support level.
Moving forward, it is imperative to seize opportunities guided by solid signals while strategically rolling positions to capture partial profits and minimize risks. We owe it to ourselves as conservatives, who respect traditional financial principles, to be vigilant in our analysis—especially in a climate where market conditions reflect the uncertainties we faced just prior to the last bear market.
In conclusion, the evidence is compelling: stocks are starting to mirror pre-bear market dynamics. As investors, we must stay prudent and ready to adapt to changing market conditions. Let’s keep our eyes on the charts, maintain our discipline, and support policies that favor economic growth while navigating these uncertain waters.
Stay informed, stay prepared, and above all, never second-guess the importance of thorough market analysis in these increasingly volatile times.
