What next for indices?

The return of US markets after their holiday should see normal service resumed, but as markets continue to move further away from February’s sudden burst of volatility, what can we expect next?

Trader
Source: Bloomberg

Given the remarkable shifts in breadth, volatility and sentiment, the path of least resistance for indices was likely to be higher. The recovery of the 50-day simple moving average (SMA) by the S&P 500 was a good sign for the bulls, as it signalled that the near-term trend had shifted back to being positive. Many traders keep an eye on the five-day SMA too and, after flattening out, this has started to rise again.

Roughly half the sell-offs since 2009 have seen swift recoveries, which are known as ‘V bounces’, due to their shape. Since 1980, the picture is less encouraging, with more sell-offs having gone on to test the low and even create a new one in the near term. For the S&P 500, this would suggest a return to 2530 or lower.

Crucially, sentiment shifted dramatically over the past month, from being very bullish to very bearish. The CNN ‘Fear and Greed’ indicator is often cited, with readings over 70 being ‘greed’, and below 30 being ‘fear’. Usually strong ‘fear’ readings indicate market bottoms, although, as 2015 and 2016 showed us, these can be retested.

The S&P 500 remains the global benchmark for equities, and it is here where the best clues can be found. The price has dropped back below 2730 and the 50-day SMA, but given Friday’s light trading and the closure of US markets yesterday, we should not read too much into these moves. Given the overstretched nature of equities on an intraday basis, a pullback is to be expected. However, for this index, we can expect support at 2630, 2597 and then at the crucial 2530 level. If these hold, then the next move would appear to be higher. A break below 2530 radically changes the picture.

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