“Bonds ain’t buying it” but US equity markets are – for now – staging yet another bounce after what CNBC has variously described as “a pause that refreshes” or a “healthy pullback.” The median stock is down over 20% from record highs…
…leaving BofA’s Stephen Suttmeier and Jordan Young to ask (and attempt an answer): “Is the S&P 500 correction over yet?”
The long and the short of it – pun intended – is, we don’t know, but these levels and drivers should help clarify the next move as volatility continues to rise.
The S&P 500 broke down from the head and shoulders top
Tactical resistance moves to 3320-3351 (last week’s high, head and shoulder top neckline, and the 50-day MA). If the SPX stays below this resistance, the head and shoulders top is firmly intact with supports at 3233-3200 (late July breakout area and rising 100-day MA), which held last week, and then 3107-3070 (rising 200-day MA and pattern count).
If the SPX regains 3320-3351, it would call the head and shoulders top into question, but a decisive move above the right shoulder peak at 3425-3430 is the signal needed to completely invalidate this tactical top pattern on the SPX.
As BofA notes, the SPX completed a 2020 cup-and-handle pattern – a longer-term bullish continuation pattern with upside counts to 3700 and 4300.
SPX 4300 is an aspirational upside count, but one that is achievable based on the bullish breakout, positive backdrop signals (Table 1 below) and our secular bull market roadmap.
Weaker seasonality and tactical risks (Table 2 below) have triggered a correction ahead of the November election, but this bullish setup stays intact if the SPX holds big support in the 3200 to 3000 range (breakout points, 100/200-day MAs and broken downtrend line).
Most notably, downside risks are highlighted by a lack of confirmation of any upside bounce from the credit markets.
The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the iShares iBoxx High Yield Corporate Bond ETF (HYG) dropped as the SPX grinded higher in August. We highlighted this as a tactical bearish divergence for US equities in Market Comment: 18 Aug 20.
Although the SPX rallied on Thursday and Friday (9/24-9/25), both of these credit market ETFs trended lower into the end of last week and did not confirm the rally on the SPX. We view this as a tactical risk for US equities.
Additionally, options markets remain unimpressed at any bounce.
The 25-day CBOE total put/call ratio probed to 16-year lows on the 2020 summer rally (Market Comment: 18 Aug 20), which we viewed as contrarian bearish entering a period of bearish US equity market seasonality.
The September correction has taken this put/call out of this deep overbought or complacent level, but it is nowhere near a contrarian bullish oversold or fearful reading with five weeks to go until the US Presidential election in early November.
Simply put, the BofA analysts warn that tactical fear may need to increase prior to a good equity market low.