“…on Friday, the VIX closed at its lowest level since November 2019 and just above the intraday lows of December 2023. The Friday close is just above 11.54, which is one-half its October 2023 peak, and might help explain why a trough was made in this area in December 2023. As such, a risk to bulls is the VIX lifting sharply off these prior lows amid lower stock prices.”
-Monday Morning Outlook, May 20, 2024
Good news with respect to the excerpt above. After the Cboe Market Volatility Index (VIX—12.53) closed at 11.99 the prior week and around its December 2023 lows, a Thursday high of 13.37 was met with little consequence overall when observing last week’s S&P 500 Index (SPX—5,304.72) price action, which can be characterized as flat.
The bad news is the Thursday, May 23 candle, when the SPX made a new high relative to the prior day’s high but closed below the prior day’s low. This is known as a bearish “outside” day, the last of which occurred on April 4, ahead of a 3.5% decline that lasted about 2-1/2 weeks. The early April bearish outside day occurred when the SPX was trading around its all-time high, which was also the case last Thursday.
As such, the low VIX reading, and the bearish outside day late last week are two short-term risks that bulls face as we enter the holiday-shortened week.
With respect to the technical risk, the one difference is that the early-April bearish “outside day” occurred within the context of a break below a bullish channel, whereas last Thursday’s bearish “outside” day did not occur in the context of a major technical breakdown. Plus, low VIX readings can persist longer than many expect, so in the absence of a technical breakdown, this risk can be downgraded too.
But both are worth mentioning and keeping on your radar in the short term so that you keep an open mind and not be totally blindsided so that you can act accordingly if conditions begin to deteriorate.
“A move below the 5,200-5,220 area would present risk for short-term traders that entered on the move to all-time highs. The 5,220 level is where the SPX broke below its January through March bull channel, and thus the area between the 5,200- century mark and 5,220 should be supportive on pullbacks.”
-Monday Morning Outlook, May 20, 2024
For those that bought the breakout, a close below the area mentioned in the above excerpt is a solid stop level if you are a short to intermediate-term buyer.
In the shortened week ahead, the economic calendar that investors will be weighing include Federal Open Market Committee (FOMC) minutes from the last meeting, April existing home sales on Wednesday, jobless claims, new home sales on Thursday, and durable goods orders on Friday.
Earnings season is winding down, but retailers will continue to report next week. These reports could be used by investors to measure the strength of the consumer and/or whether retailers are benefitting from higher prices. Some of the more notable reports include Abercrombie & Fitch (ANF), American Eagle (AEO), Chewy (CHWY), Advanced Auto (AAP) and Dick’s Sporting Goods (DKS).
On the sentiment front, per the chart immediately below, there was a slight uptick in put buying relative to call buying on SPX component stocks. This may have created a slight headwind for the overall market.
The turn higher in the 10-day, buy (to open) put/call volume ratio on SPX components is a minor concern right now, since it is not turning higher from an extreme low, nor is it occurring within the context of technical deterioration in the broad market. We will continue to keep an eye on this.
An indicator of sentiment that I have not discussed in a few weeks is how short-term option speculators are placing their bets on the direction of the broader market. I use the five days of open interest changes on just-expired weekly SPDR S&P 500 ETF Trust (SPY—529.44) options.
Last week, note that there was a put bias on the SPY 5/24 expiration options. This suggests that short-term traders are betting on a decline, even as the broad market is not showing signs of breaking down. This has typically been bullish in its implications from a contrarian perspective.
Hope your holiday weekend was both safe and relaxing.
Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.
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