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The Stock Market Can Keep Going Up as Long as This Key Indicator Remains Negative

March 31, 2024
minute read

The United States stock market, as gauged by the S&P 500 index, achieved a fresh record high in closing on Thursday, maintaining the ongoing bull market trend. The S&P 500 finds robust support within the range of 5,050-5,180, an area where trading occurred during late February and early March. Beneath this level, there exist multiple support tiers; however, a closure below 5,050 would be interpreted negatively by many traders, likely prompting sell signals from our indicators.

One potential upside target lies at the +4σ "modified Bollinger Band" (mBB). A closure beyond this threshold could potentially trigger a sell signal, although such a signal is not guaranteed even upon surpassing the band. Presently, this band is on an upward trajectory and nears 5,300. On the day marking the intraday high (March 21), the SPX nearly reached the +4σ band but failed to close above it.

The equity-only put-call ratios are exhibiting sideways movement at historically low levels on their charts, indicating an overbought state in the stock market but not yet signaling a sell. A significant rise in these ratios would be preferred to confirm a sell signal. However, they continue to fluctuate with minimal fluctuations. Both charts are annotated with a "S?" to suggest the potential for a sell signal but one that has not yet been verified.

Market breadth has been somewhat inconsistent, with three strong days leading up to the all-time intraday highs on March 21 followed by a subsequent weakening before rebounding on March 27, thereby maintaining weak buy signals. Despite the S&P 500 hitting new highs, overall market breadth has been lackluster, attributable to the non-participation of many stocks in the rally. Cumulative volume breadth (CVB), a measure reflective of this specific market, hit another all-time high on March 27, indicating robust volume in select stocks chased by institutional buyers.

On the NYSE, new highs continue to surpass new lows, a bullish indicator that has persisted since last November, albeit subject to reversal if new lows outnumber new highs for two consecutive days.

Volatility indicators remain supportive of the stock market, with the VIX at low levels allowing for continued stock advances. The downward trend in VIX and its 20-day moving average, both below the 200-day MA, bodes well for stocks. Additionally, volatility derivatives such as VIX futures and Cboe Volatility Indices exhibit upward sloping term structures, with futures trading at a significant premium.

To summarize, a "core" bullish position is maintained, with adjustments made to option positions based on their performance relative to the market. Conditional recommendations remain, including a potential longer-term buy signal for Walgreens Boots Alliance Inc. (WBA), contingent on it closing above $22.50. Additionally, a new recommendation suggests shorting volatility, capitalizing on the decay of the futures premium through the purchase of ProShares Short VIX Short-Term Futures ETF (SVXY) options.

It's crucial to exercise caution given the historical precedent of volatility spikes, as witnessed with the predecessor short volatility ETN (XIV). Buying calls mitigates risk, ensuring a fixed exposure even in the event of extreme volatility spikes.

John Liu
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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