August 15, 2023
The S&P 500 (SPX) has slipped to first level technical support in the 4438-4460 range with the index currently sitting on its 50-day moving average of 4447. Next level support sits at 4405 with a sustained break below that level derailing bullish trend dynamics that formed in late May. Closing levels below 4405 also increase the likelihood for a test of the bullish inflection at ~4200. Better-than-expected US macro data in late-May led to expanded market breadth and cyclical sector leadership that ultimately pushed the index above 4200. Note that cyclical sector leadership in late May followed the US Economic Surprise Index (ESI) breaking above its 200-day moving average. We’ll now use an ESI break below the 200-day average as an early downside warning signal.
Volatility: Implied equity volatility as measured by the VIX Index remains subdued at 15.80. The threat of waterfall decline in equity markets seems low as long as the VIX remains below 22. Given a lack of meaningful near-term catalysts, generating a VIX level above 22 probably requires an exogenous shock of some sort. This increases the likelihood for the SPX to hold above 4405.
Contrarian: Equity sentiment and positioning are no longer bullish supports for markets. The weekly AAII survey remains at bullish extremes, while the BofA August Global Fund Manager Survey signaled the least amount of bearishness since February ’22. The survey also revealed the smallest equity underweight since April ’22 with cash levels slipping below 5%.