Inside Markets — Seller Exhaustion

Equity sentiment is at extremes with last week’s AAII survey recording the third-highest bearish number in history. Perhaps more important was the Daily Sentiment Index (DSI) for S&P 500 futures falling to 9% bullish this morning from 47% 24 hours after the tariff announcement. Single digit DSI readings are an indication of extreme seller exhaustion that often precede meaningful counter-trend rallies.

Last week’s trade policy announcement pushed SPY (SPX ETF) below its 52-week Volume Weighted Average Price (VWAP) at ~5500. In the past, the 52-week VWAP has marked a key inflection in markets. Early last week, we warned that a sustained break below ~5500 would likely generate a high volatility bearish extension to test ~5100. The key word from the last sentence is ‘sustained’. The SPX closed just below that level on Friday, but a recovery this afternoon would confirm ~5100 as support with strong technical resistance at ~5500.  Last week’s decline in the SPX has pushed the CBOE Equity Volatility Index (VIX) well above elevated levels (>22) that serve as a headwind for rally attempts. The VIX has also moved above 30, which we consider ‘escape velocity’ that often takes months to unwind.

Equities need to see a credible tariff off-ramp before moving higher. But negativity is currently so extreme that a slow rolling series of trade negotiations could do the trick with the potential for encouraging tax/deregulation developments pushing the SPX back above ~5500.