Bulls Are Being Tested by the Stock Market to See if They Can Keep Up

The S&P 500 index has recently witnessed a couple of significant downturns, particularly following what was interpreted as an unfavorable consumer-price index reading. While the actual figure wasn't particularly dire, it sparked concerns regarding the Federal Reserve's stance on interest rates, raising doubts about the possibility of rate cuts in the near future, or perhaps even for the foreseeable future. Personally, I view this reaction as somewhat hasty, especially considering that most astute investors haven't been banking on rate cuts for quite some time now.

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Although the S&P 500 and other major U.S. markets rebounded on Thursday, a potential closure below the 5,050 mark could introduce more pronounced negative implications, potentially triggering technical selling. Notably, resistance is evident around the 5,260 level, where the S&P 500 encountered peaks on four separate occasions in recent weeks.

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Despite these fluctuations, the S&P 500 chart maintains a predominantly bullish outlook, as long as the index remains above the 5,050 threshold. Consequently, we intend to uphold our core bullish positions for the time being, albeit with out-of-the-money calls currently in place.

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Moreover, equity-only put-call ratios have been trending upwards, confirming sell signals for stocks. When these signals arise from extreme lows, particularly in the context of extreme overbought conditions as seen presently, they often prove to be durable. These sell signals will persist until they reverse course and begin trending downwards.

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Additionally, market breadth has exhibited a lackluster performance overall, with breadth oscillator sell signals persisting from a week ago. Consequently, breadth, alongside the put-call ratios, represents the first two sell signals following an extended upward trajectory in stocks.

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On another note, while new highs on the New York Stock Exchange had been dominating until April 10, a shift occurred as new lows slightly outnumbered new highs. Should new lows continue to surpass new highs, it would negate the prevailing buy signal, which has been largely intact since November. However, if new highs reclaim dominance, the bullish sentiment would remain intact.

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The Cboe Volatility Index, or VIX, has largely remained subdued despite recent market downturns. Although there has been a gradual uptick in VIX since late March, it hasn't entered a "spiking" mode, characterized by a significant advance over a brief timeframe. Similarly, the trend of VIX has yet to turn upward, a potential bearish signal that would manifest if both VIX and its 20-day moving average cross above the 200-day MA.

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Furthermore, volatility derivatives continue to exhibit mostly bullish indicators for stocks, with upward-sloping term structures evident in VIX futures and Cboe volatility indices. Despite minor fluctuations, the prevailing upward trend remains dominant, instilling optimism.

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In conclusion, while maintaining a core bullish position due to the S&P 500 chart, we are vigilant of other confirmed signals, adjusting our approach accordingly.

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