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The Bottom is Holding
The S&P500 was rangebound last week, but ended on a high note. We remain on our bullish call from March 16 as we believe the bottom has already been made for this cycle. So far we have been correct, and recent signals were supportive.
We had a large (90%) volume breadth thrust on Friday Mar 14th, followed by another on Monday Mar 17th. Concurrently, the market had a strong move off the bottom. Back-to-back breadth thrusts are rare and strongly indicate that a rebound is forming. Until the price lows are broken, we have no reason to believe the trend is over.
Breadth also made a strong recovery this week. This is often a precursor to durable market rebounds. Chart below shows % of stocks above the 20-day average; every major selloff in the past saw this metric touch lows, then rebound sharply above 50% to get back into bullish territory. We're just under that level today.
The number of stocks making new highs tells the same story. In a healthy bull market, 80 or more stocks in the NYSE should be making new highs every day. Since this selloff was deeper than usual, it may take a bit longer for this metric to recover.
Last but not least, our 2022 analog continues to track. Recall that in 2022 the post-Covid internet bubble was bursting, similar in many ways to the AI bubble today. In 2022 the Fed was hiking rates aggressively into an economic slowdown, similar to today, only now it’s the Trump administration doing the fiscal “hiking”. Positioning was elevated in 2022, and we witnessed a sharp selloff as major players unwound their positions, similar to what we had this year.
So what’s the next phase of the 2022 bear market? At that time, we had a 10% rally off the bottom (depicted above) followed by another selloff to new lows as the recession played out. Will we follow the same track this time around? Our sense is that the recession won’t happen again this time so the rally should be more durable. But we won’t know for sure until we get there. We have to play it week by week. Suffice it to say, we are not out of the woods yet and while our bottom call has been correct so far, this market could still turn around at any point.
Volatility is Your Friend
Ahead of Friday’s options expiry, SPX was pinned between 5600 and 5700. A large amount of put and call options were sold at these strikes, which meant that market makers would pin SPX within this range. To be clear, this is not market manipulation as many like to think. Rather, dealers are compelled to do this due to the options they've traded.
With the bulk of these options expired and gamma moving back into positive territory, markets should be a bit more stable, with less selling pressure ahead.
Volatility continues to decompress, precisely what we want to see at market bottoms. Don’t be surprised to see a few bounces back up to the low-20s before we ultimately get back down to calmer levels. This is conducive for the equity rally to continue.
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