Stocks Are Trying to Break Out, but Bulls Can't Catch a Break

The S&P 500 experienced a setback on Thursday as it attempted to solidify an upward breakout. Earlier in the week, the index had notched record highs for two consecutive days, similar to a pattern seen in mid-January before it slipped into a trading range, resulting in a false breakout. Although not all market indicators are aligned, several are signaling bullish momentum, leading to the initiation of a conditional “core” long position.

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A key level to watch is 6,100—should the S&P 500 close below this mark, concerns about a failed breakout would increase. However, there is notable support around the 6,000 level, with a more significant support zone near 5,870, which marks the lower boundary of the previous trading range.

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With new all-time highs, the index lacks overhead resistance, but analysts often look to the +4σ “modified Bollinger Band” as a potential target. Currently positioned at 6,230, this upper band fluctuates based on volatility and price movement.

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Put-call ratios, a key measure of market sentiment, remain bullish as they continue to decline. Initially, there was some skepticism regarding the standard ratio, but it has since confirmed the trend. Both ratios are approaching historically low levels, indicating overbought conditions.

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However, in a strong bullish breakout, they could continue declining further, mirroring patterns seen in late 2020 and throughout much of 2021.

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One area of concern is market breadth, which remains weak. Despite the S&P 500 reaching new highs, the breadth indicators have not followed suit. On February 19, when the index recorded a fresh peak for the second consecutive day, market breadth was negative for both the NYSE and “stocks only” metrics.

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Ideally, a broad-based rally would support a new high, but this divergence raises some caution. The NYSE breadth oscillator remains on a sell signal, while the “stocks only” breadth oscillator has shifted to a weak buy signal.

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The Cboe Volatility Index (VIX) showed a brief spike on Thursday but has generally remained subdued. Even amid market turbulence, including tariff announcements and inflation data releases, VIX has failed to rise significantly. This stability keeps the “spike peak” buy signal intact. The trading model built around these signals suggests maintaining a long position for another six trading days unless VIX closes above 22.51, which would invalidate the signal.

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Currently, there is no trend-based signal from VIX, as the index and its 20-day and 200-day moving averages are closely aligned. However, the structure of volatility derivatives remains supportive of equities. The VIX futures term structure and the broader Cboe volatility indices are maintaining an upward slope, reinforcing the bullish outlook.

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The front-month VIX futures contract now corresponds to March, meaning analysts will be monitoring its relationship with April’s contract. If the March contract moves above April’s, it could indicate trouble for stocks, but there is no immediate risk of this happening.

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Given these conditions, a long “core” bullish position is being established, with adjustments to be made as new signals emerge. Additionally, deeply in-the-money positions will be rolled to lock in partial gains and mitigate risk.

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