The Latest Flip in Market Sentiment is Alarming

It feels like February.

Folks who can remember back that far will recall that the stock market had put on a blistering rally to start the year.

The S&P was up nearly 400 points in six weeks.

Investor sentiment, which was wildly bearish in late December, flipped to bullish by early February.

And, the Volatility Index (VIX) had dropped to its lowest level in a year.

Meanwhile, traditional “risk-on” assets, like high yield bonds, were lagging the move in stocks.

This was a warning sign that the intermediate-term rally in the stock market was nearing an end. And, we advised caution.

That same advice applies today.

The S&P 500 has put on quite a show over the past three months – rallying 500 points and hitting its highest level in more than a year.

The American Association of Individual Investors survey has flipped from 19% bullish and 48% bearish on March 15 to 45% bullish and 23% bearish as of Wednesday. And, the VIX is trading near its lowest level in three years!

There’s a good chance that yesterday’s run to 4438 on the S&P marked an intermediate-term high, and we’re now headed for a correction phase.

But, just as the correction that started under similar conditions in February and caused a 300-point decline in the S&P in about one month, the coming decline will not be a straight shot lower.

Folks who missed out on the rally over the past three weeks will be anxious to buy into any weakness. So, we’ll likely get one or two bounce attempts before we see any significant selling pressure.

Take a look at this chart of the S&P 500…

In February, the first decline from the high found support at the 9-day EMA. Then, the index bounced and formed a lower high. And the next decline formed a lower low. That confirmed the start of an intermediate-term correction phase.

That’s the action I’m looking for over the next several days. And, that’s the action that could lead to an intermediate-term decline over the next several weeks.

Of course, it doesn’t have to happen that way.

If the market declines and then rallies to make a higher high, then forget about everything I just wrote. We’re dealing with a different animal.

For now, though, it seems prudent for investors to be a bit cautious here.

Best regards and good trading,

Jeff Clark

Are you looking for a decline in the S&P 500 over the coming weeks?

Let us know your thoughts – and any questions you have – at [email protected].