S&P 500 in Correction: Assessing the Market Landscape

The S&P 500 Index (SPX) has recently entered a correction phase, signaling significant concerns among investors. As the market continues to fall, it has breached key support levels, including a critical trading range that had been established since November. With more uncertainties ahead, many traders are left questioning the potential for a turnaround.

Current Market State

As of this week, the S&P 500 appears to have established tentative support near the lows of approximately 5,525. There is also a possibility of support at the 5,400 level, which reflects lows from September of last year. Despite the U.S. market being notably oversold, it is essential to acknowledge that being oversold does not equate to an immediate “buy” opportunity. Buyers are currently scarce, leading to a wait-and-see approach among investors looking for confirmed buy signals, which remain elusive.

Oversold Conditions and Market Signals

Oversold conditions can lead to robust rallies; however, these often fade when they approach the declining 20-day moving average, which is presently around 5,900 and is dropping rapidly. Should a rally occur, this would suggest a potential uptick of around 300 points as the market finds its footing again.

Indications of an oversold condition within SPX can be observed via the modified Bollinger bands (mBB). The SPX is currently trading well below the -4σ mBB, which might eventually close the gap towards generating a McMillan Volatility Band (MVB) buy signal. However, for this to happen, the SPX must first close above the -3σ band to provide a classic buy signal. Notably, traders are currently reluctant to act until there is further price confirmation that justifies such a move.

Put-Call Ratios and Market Breadth

The equity-only put-call ratios are presently on sell signals for stocks, as the ratios continue to trend upward at a steady pace. For these ratios to revert to buy signals, they must first roll over and begin declining. Market breadth reflects a similarly bearish scenario, particularly with “stocks only” breadth lagging behind New York Stock Exchange breadth by a substantial margin. Both breadth oscillators remain on sell signals and are deeply entrenched in oversold territory.

To shift these oscillators to buy signals, it would necessitate at least two to three consecutive days of positive breadth. A telling sign of the market’s oversold condition is that both oscillators have diverged significantly. When they converge, a short-term (one-week) buy signal for stocks could be generated. Despite the numerous new lows being registered on the NYSE, which continues to overshadow new highs, this indicator remains firmly in sell territory. Only 11 new highs were registered on Wednesday, a statistic reminiscent of the market’s correction in April 2024.

The VIX Indicator and Market Volatility

The Cboe Volatility Index (VIX) has been on the rise, reinforcing the persistent sell signal in the VIX. A notable spike-peak buy signal was recorded on March 12, when the VIX reached a high of 29.57 on March 11, followed by a close that was more than 3.0 points below that high. Yet, previous attempts at a VIX spike-peak buy signal have often faltered due to subsequent closures above past peaks, exhibiting the challenging volatility landscape.

Additionally, the structure of volatility derivatives has become notably bearish in recent weeks, showing parallels to the March 2020 pandemic market phase. The downward slope of VIX futures’ term structure, alongside the inversion in front-month VIX futures, signals a bearish trend for stocks.

Summarizing the Current Outlook

In summary, the only buy signal currently in place is the aforementioned VIX spike peak, which has struggled to gain momentum. The number of oversold conditions suggests that a sharp, albeit potentially short-lived, rally may emerge as the market rallies back towards the declining 20-day moving average, now sitting approximately 300 points above current levels.

Investors who are keen on maneuvering through this correction will need to remain vigilant for strong signals confirming a viable entry point, as the market landscape continues to unfold.