Morning Notes — What to Expect

The S&P 500 is bouncing off deeply oversold levels after a successful two-session reversal (Monday and Tuesday). At the moment, the SPX has rallied +15.5% from Monday’s low, which matches our expectations for a 10-25% oversold bounce. Technical resistance lies just ahead at ~2650 and again at ~2700. Typically, these oversold bounces lose momentum at technical resistance and quickly retest the lows. Of course, the conditions that created this bear market are anything but ‘typical.’ However, until proven otherwise, we should assume the retest scenario and a successful retest usually makes a slightly lower low and often feels worse than it looks. Equity sentiment remains at bearish extremes with the weekly AAII data reaching a new record of 52.07. Extreme levels of bearish equity sentiment is a highly reliable contrarian indicator. The previous all-time record of 51.31 was reached last week and the record before that was 50.30, reached on December 27, 2018. But we started adding broad equity exposure on December 21, 2018, partly based on another equity sentiment indicator reaching bearish extremes. The ultimate low was made on December 24, 2018. That indicator was the CBOE equity put/call ratio that made an all-time record high of 1.13. That record was broken when it reached 1.28 on March 12, 2020. Note the rally that followed the December 24, 2018 low was only tested by a weak, single day downtick on January 3, 2019.