SSo far, the S&P 500 (SPX – 4,271.78) is down -5.14% month-to-date, amid a historically bullish April. Earlier this month, I posted a chart on Twitter highlighting the average returns for the month. However, I pointed out that when the S&P 500 is negative in April, it has been in the range of -5% or more for the past 20 years.
It seems to be happening again, with a week to go. Of course, the market may rebound fiercely this week if we get some good news, although it may take more than earnings to beat expectations. According to data from Refinitiv Eikon, 77.8% of companies have exceeded earnings so far, while selling pressure has increased. Macro factors are clearly driving this market, and we probably need to see some positive notes on that front. We might struggle to get that with the US Federal Reserve behind the curve, however, and the Russian-Ukrainian conflict seemingly far from over.
April is historically the most bullish month at +1.68% since 1950. Over the past 10 years +2.95% and has been positive 90% of the time. FWIW, when it’s been bearish over the past 20 years, it’s usually been negative by more than 5%.
— Matthieu Timpane, CMT (@mtimpane) March 31, 2022
As we head into a seasonally weaker time of year, bulls are likely hurt as they expect those April showers of bountiful gains. Going back to 1950, looking only at the bear months of April, the average return for the month of May is -0.11%. On the surface, this seems rather ordinary, as May returns have averaged +0.17% since 1950, with the month being positive 59.8% of the time.
However, when April is negative, May is only positive 47.62% of the time, but the dispersion of returns is slightly above average. When May was bullish it was positive +3.54%, and when it was bearish it was down -3.44%. This is slightly wider than the average dispersion of returns, so we can expect the possibility of a somewhat more volatile than usual May to continue with the volatile nature of this year.
“But if you need more proof, the straw that breaks the camel’s back would be a notable break below the 4,300 century mark, which was support for the September and January lows. A break of 4,300 would likely result in a retest of the 2022 lows at least.”
– Monday Morning Outlook, April 18, 2022
Bear markets tend to leave bulls feeling deflated, as we often see breakout reversals and violent, short-lived rallies from support levels before pulling back into the larger trend. This is the classic bear market price action we are experiencing right now. The early-week rally on the back of earnings simply dissipated and broke S&P 500 support around 4,380 as equity markets raced into over the weekend.
We highlighted this level last week, and now the bulls must turn to lower support levels to hold. The level on the bridge is roughly right where we closed at 4271, which is not only slightly below the -10% level since the start of the year, but also close to the intraday lows of October 2021. which served as support after the first swoosh lower in late January.
Moreover, this level served as a pivot that allowed the markets to rebound in mid-March, making it an essential level. If the S&P 500 fails to recover above 4,278 in early trading this week, and preferably closes above the October 2021 closing lows at 4,300, we open the door below to February and March lows around 4,150. Also, if this level fails, we are on track to test 3,980 or even 3,860. In other words, things could go wrong quickly.
“Two charts struck me last week. The first suggests an increased risk of increased volatility and falling stock prices in the near future. VIX futures options buyers are again buying calls versus puts at a rate that has historically preceded equities’ troubles over the past year.”
– Monday Morning Outlook, April 4, 2022
Additionally, volatility has reappeared this week after a slight dip below 20. We have previously hinted at the possibility of a volatility spike as we watch rising call/put ratios on the volatility index. CBOE (VIX – 28.21) over the past few weeks. This week, we saw the VIX’s 20-day call/put ratio climb to 4.76. When we’ve seen surges like this in VIX call activity, especially above 5.0, it’s usually smart money entering ahead of high volatility. Watch how the VIX acts around level 30 if it gets there. The dropouts have been short-term market lows, but when they hold above 30, we can see powerful downward moves in stocks.
The breadth also seems to support that we haven’t seen a chapter background yet. While we saw short-term sentiment and magnitude indications of a rebound in March, we never saw longer-term magnitude indicators give us a green light. They don’t have to if the price action had remained bullish, but that’s not what we’re experiencing, despite my inner nature of being bullish.
New highs minus new lows remain in a downtrend, and the advance-decline line for the New York Stock Exchange (NYE) and other indices remain in a downtrend. Finally, the percentage of stocks trading below their 200-day average in the S&P 500 never broke through the extreme levels that I traditionally like to see in larger pullbacks, as it only managed one reading 37.07% on March 7. Typically, I want to see movement below 20% for this chapter runout.
Additionally, the 10-day sell/buy ratio of the S&P 500 constituents continues to rise from an already relatively high level, which has been a sign of bear markets in the past. However, the good news is that we saw an outsized single-day spike in the CBOE put/call ratio at 0.87. We usually start seeing these spikes when we approach potential lows in the market, so while we could certainly have more downside, these spikes suggest we could be approaching a meaningful bottom for stocks.
So the yield curve inverted… However, some of the best bull markets happened after the initial inversion. This is the reversion you should really be worried about and generally any decent sell on the big names is a good buying opportunity.
$TNX $SPY pic.twitter.com/9gfYY7I0QP
— Matthieu Timpane, CMT (@mtimpane) March 29, 2022
However, all is not lost for the bulls. Rising rate environments are often bullish for stocks. Moreover, initial yield curve inversions generally do not produce immediate market meltdowns or instant recessions, no matter how much the media likes to stoke these fears. We have seen some of the best bullish rallies after reversals as they lead to an explosive top. You simply can’t stay out of these series just because the yield curve has inverted, so pullbacks like the one we’re experiencing tend to be good medium-term buying opportunities once you see the return of bullish price action.
However, this type of market environment can be challenging for market participants. We remain cautious until we see an improvement in the overall trend or a moment of capitulation. However, there are still pockets of opportunity on the long side if you dig into the carnage, and we cannot rule out a rally from where we closed on Friday.
But, if you haven’t already added coverage to your portfolio for insurance, you might want to consider broader index put options at this point, if the sell continues, rather than call options. VIX, because they are much more expensive than in previous weeks. we have mentioned them for coverage purposes.
Matthew Timpane is Schaeffer’s Principal Market Strategist
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.