The S&P 500 (SPX) recently celebrated new all-time highs, a victory seemingly shared by small-cap stocks and other previously unloved sectors. Yet, the market’s rhythm experienced an unexpected shift on July 17th. SPX stumbled, while the Dow Jones Industrial Average (DJIA) ascended, driven primarily by stocks absent from the SPX.
This divergence reveals a potential rotation within the market. While not a full-fledged sell signal for the S&P 500 yet, the undercurrent suggests a changing tide.
Charting the Course: Support Levels and Market Signals
The SPX chart reveals crucial support zones at 5,440-5,490 and 5,370. A breach below 5,370 could usher in a more pessimistic outlook.
The “modified Bollinger Band” (mBB) indicator, often used to assess market volatility, has also triggered a sell signal. However, a more definitive signal, the McMillan Volatility Band (MVB) sell signal, would require SPX to trade at or below 5,572.
Market Breadth: A Mixed Message
Equity-only put-call ratios, typically used to gauge market sentiment, remain near their lows. While the standard ratio continues to decline, reaching levels not seen since late 2021, the weighted ratio has started to climb. This divergence might hint at a potential sell signal, though confirmation requires a further rise in both ratios.
Market breadth, however, paints a more optimistic picture. The recent surge in small-cap stocks has significantly broadened market participation. Despite this, a few days of negative breadth could shift the current bullish breadth oscillators to sell signals.
Furthermore, cumulative volume breadth (CVB), a measure of buying and selling pressure, has demonstrated exceptional strength, making consecutive all-time highs. This strongly supports the SPX’s recent highs.
New Highs vs. New Lows: A Bullish Battle
The number of new highs on the NYSE continues to outpace new lows, reinforcing the bullish sentiment. However, this trend could be reversed if new lows surpass new highs for two consecutive days.
VIX: The Volatility Index Speaks
The VIX, a key volatility indicator, has edged above its 200-day moving average, potentially jeopardizing a VIX buy signal. While not yet a sell signal, another close above this moving average could tip the scales.
Volatility Derivatives: A Bullish Bias
Despite potential shifts elsewhere, the structure of volatility derivatives remains bullish for stocks. The term structures continue to slope upwards, and VIX futures are trading at a premium to VIX.
The Verdict: Cautious Optimism
For now, a core bullish stance seems warranted, supported by the generally positive nature of the SPX chart. However, vigilance is key, and traders should be prepared to adapt to any confirmed signals that may arise.
