So far, the S&P 500 Index (SPX – 4,271.78) is down -5.14% month-to-date, amidst the historically bullish month of April. At the start of the month, I posted a chart on Twitter highlighting the average returns for April. However, I emphasized when the S&P 500 is negative in April, it's been to the tune of -5% or more over the past 20 years.
This appears to be unfolding once again, with one week to go. Of course, the market can rally back ferociously this week if we get some good news, although that might take more than earnings beating expectations. Per Refinitiv Eikon data, 77.8% of companies have beat earnings thus far, while selling pressure has increased. Macro factors are clearly driving this market, and we likely need to see some positive notes on that front. We may be hard-pressed to get that with the U.S. Federal Reserve behind the curve, though, and the Russia-Ukraine conflict seemingly far from over.
As we head into a seasonally weaker period of the year, bulls are likely wounded as they've come to expect these April showers of bountiful gains. Going back to 1950, when analyzing only bearish months of April, the average return for the month of May is -0.11%. On the surface, that seems rather ordinary, since returns for May on average are +0.17% since 1950, with the month being positive 59.8% of the time.
However, when April is negative, May is only positive 47.62% of the time, but the dispersion of returns is slightly greater than average. When May was bullish, it was positive by +3.54%, and when bearish, it was down -3.44%. This is slightly wider than the average dispersion of returns, so we can expect the possibility of a somewhat more volatile May than usual to continue with this year's volatile nature.
“But if you need more evidence, the final straw would be a notable break below the 4,300-century mark, which was support at the September and January lows. A break of 4,300 would likely result in a retest of the 2022 lows at least.”
- Monday Morning Outlook, April 18, 2022
Bear markets tend to leave bulls feeling deflated, as we often see breakout reversals and violent, short-lived rallies off support levels before rolling back into the broader trend. This is classic bear market price action we're experiencing right now. The early week rally on the back of earnings simply dissipated and broke support on the S&P 500 around 4,380, as equity markets cascaded into the weekend.
We highlighted this level last week, and now bulls need to look towards lower support levels to hold. The level on deck is roughly right where we closed at 4,271, which is not only just slightly below the -10% year-to-date level, but also near the October 2021 intraday lows that held as support after the first swoosh lower in late January.
Additionally, this level served as a pivot that allowed the markets to rally higher in mid-March, making it an essential one. If the S&P 500 fails to break back above 4,278 in early trading this week, and preferably close above the October 2021 closing lows at 4,300, we open the door below to the February and March lows around 4,150. Moreover, if that level fails, we're on a path to test 3,980, or even 3,860. In other words, there is potential for things to get ugly fast.
“Two graphs stuck out to me in the past week. The first suggests heightened risk of higher volatility and lower stock prices in the near future. VIX futures options buyers are again purchasing calls relative to puts at a rate that has historically preceded trouble for equities in the past year.”
- Monday Morning Outlook, April 4, 2022
Furthermore, volatility re-emerged this week after a slight dip below the 20 level. We previously alluded to the possibility of a volatility pop, as we have been monitoring rising call/put ratios on the CBOE Volatility Index (VIX – 28.21) for the past few weeks. This week we saw the VIX 20-day call/put ratio surge to 4.76. When we've seen surges like this in VIX call activity, especially over 5.0, it's typically been smart money entering ahead of a large volatility pop. Watch how the VIX acts around the 30-level if it gets there. Stall-outs have been short-term market bottoms, but when it holds above 30, we can see powerful moves lower in equities.
Breadth also seems to support that we haven't seen a capitulatory bottom just yet. While we saw short-term sentiment and breadth indications for a bounce in March, we never saw longer-term breadth indicators give us an all-clear. They don't have to if price action would have remained bullish, but that is not what we're experiencing, despite my inner nature to be an optimist.
New Highs minus New Lows remain in a downtrend, and the Advance-Decline Line for the New York Stock Exchange (NYE) and other indexes remains in a downtrend. Finally, the percentage of stocks trading below their 200-day average in the S&P 500 never breached the extreme levels I traditionally like to see in more significant pullbacks, as it only managed a reading of 37.07% on March 7. Typically, I want to see a move below 20% for that capitulatory flush out.
Moreover, the S&P 500 components 10-day buy-to-open put/call ratio continues to move higher from an already relatively high level, which has been indicative of bear markets in the past. However, the good news is that we did see an outsized, single-day spike in the CBOE equity-only put/call ratio to 0.87. We typically start seeing these spikes happen as we near potential market lows, so while we certainly could have more downside, these spikes suggest we could be getting closer to a significant bottom for stocks.
Not all is lost for the bulls, though. Rising rate environments often are bullish for equities. Plus, initial yield curve inversions typically don't produce immediate market meltdowns or instant recessions, no matter how much the media likes to stoke those headline fears. We've seen some of the best bull rallies after inversions, as it leads toward a blow-off top. You simply can't sit out of these runs just because the yield curve inverted, so pullbacks like the one we are experiencing tend to be good buying opportunities in the intermediate term, once you see bullish price action return.
These kind of market environments can be tough for market participants, though. We remain cautious until we see some improvement in the broader trend or a capitulatory moment. However, there is still pockets of opportunity on the long side if you dig through the carnage, and we can't rule out a rally from the level we closed at on Friday.
But, if you haven't already added a hedge to your portfolio for insurance, you might want to consider broader index puts at this point, if the selling continues rather than VIX call options, since they're much more expensive than the previous weeks we mentioned them for hedging purposes.
Matthew Timpane is Schaeffer's Senior Market Strategist
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