The Market Must Not Be Watching The News
In my previous May 8th article for Forbes, entitled US Stock Market At Major Crossroads, I pointed out that the benchmark S&P 500 (SPX) was positioned just below major overhead resistance at its 200-day moving average. This was important because the 200-day moving average is a widely-watched major trend proxy, and SPX’s position below it indicated the major trend was still down.
In the same article I also showed that our Asbury 6 — a quantitative model my firm Asbury Research uses to make tactical investment decisions — had just turned back to a Positive status on April 6th after being Negative/Risk Off since February 24th. This indicated favorable conditions for more near term strength — despite the bearish major trend in SPX.
The table below shows that, through the close on June 2nd — despite a global pandemic, 40 million people unemployed, a slew of corporate bankruptcies, and rioting in the streets — the Asbury 6 is still Positive. (Four or more positive, or green, constituents indicate a bullish bias.)
This simply means that a comprehensive list of internal market metrics — including the relative performance of stocks versus bonds, investor asset flows, credit risk, and market participation — indicate, improbably, the market is still internally healthy.
The next chart below plots the S&P 500 daily since July 2019. It shows that the healthy internal condition of the market, per the Asbury 6, has over the past week helped push the index back above its 200-day moving average (orange line), which is currently at 3005. This move back above SPX 3000 suggests the major trend in the US broad market index is turning bullish again and also that — bigger picture — the 2009 secular uptrend (blue dashed line) is resuming.
The red dashed lines show that the next two potential stopping points above the market are at SPX 3137 and 3215, which are about 1% and 4% higher. As long as the Asbury 6 remains Positive, it is likely these levels will be tested later this month.
Volatility: Another Key To Tactical Market Direction
In addition to the Asbury 6, I am also keeping a very close eye on market volatility. The next chart below plots SPX daily since March in the upper panel (black bars) with a corresponding chart of the CBOE Volatility Index (blue bars) — better known as the VIX or the Fear Gauge — and its 21-day moving average (red line) in the lower panel. We use the 21-day MA to identify the VIX’s monthly (our Tactical time period) trend.
The green highlights show that the VIX has been below its 21-day MA since March 31st, and that this has closely coincided with the current late March rally in the S&P 500. The red highlights on the left side of the chart show that the sustained rise in the VIX, above its 21-day MA between Feb 19th and Mar 30th, closely coincided with SPX’s sharp collapse during that period.
The message of the chart is this: as volatility decreases, the market gains confidence.
The green arrows show that, since March 31st, each time the VIX tested and held its 21-day MA from below coincided with a near term bottom in SPX.
As long as the VIX remains below its 21-day MA and the Asbury 6 remains Positive, this stock market rally — as improbable as it may be — is likely to continue.
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