Bear Market Rally Or Emerging Bullish Trend?

The Bottom Line

The May 26th bullish shift in stock market internals, according to The Asbury 6, combined with too bearish investor sentiment, suggest that at least a Tactical (monthly) bottom and potentially a Strategic (one to several quarter) bottom is in place in the S&P 500 at its May 20th low. However, a sustained rise above S&P 500 4157, which is currently being tested, amid a sustained decline below 24.00 in the CBOE Volatility Index (VIX), would be necessary to help confirm the current US stock market rebound is not just a temporary bear market rally.

Market Internals Have Turned Positive

The table below displays the Asbury 6, which is my firm Asbury Research’s risk management model. The Asbury 6 utilizes six diverse market metrics to look beyond the day-to-day, up-and-down noise of the stock market to determine its actual health — in much the same way as a doctor first checks the patient’s vital signs during an office visit. We view the “A6” as a lie detector test for the stock market.

The table shows that, through Tuesday June 8th, all Asbury 6 constituent metrics are positive (green). The “A6” model itself has been on a Positive status since May 26th and the S&P 500 has risen by 5% since then.

The Asbury 6 has identified the stock market’s May 20th low as being a Tactical bottom. Moreover, as long as the “A6” remains on a positive status, the current near term market rally is likely to continue.

How To Interpret The Asbury 6: Four or more metrics in one direction, either Positive (green) or Negative (red), indicate a Tactical bias. The dates in each cell indicate when each individual component of the A6 turned either positive (green) or negative (red). When all Asbury 6 are positive, market internals are the most conducive to adding equity risk to portfolios. Each negative reading adds an additional element of risk to participating in current or new investment ideas.

Investor Sentiment: Major Bottom Emerging?

The lower panel of the next chart below plots weekly investor stock market sentiment according to the Investor’s Intelligence Survey (www.investorsintelligence.com) with a corresponding chart of the S&P 500 (SPX) in the upper panel. This is a survey of intermediate to long term oriented stock market newsletter writers (which actually includes Asbury Research).

The green highlights show that this survey is at a 12-year least bullish extreme that, as a contrary indicator, has previously coincided with or closely led what have arguably been the most important bottoms in the benchmark S&P 500 during this period.

We interpret this as an indication that the US stock market is either already at or within a month or so of a Strategic, one to several quarter bottom.

What’s Still Missing: Lower Volatility

The lower panel of the next chart below plots the CBOE Volatility Index (VIX) daily since January with a corresponding chart of the S&P 500 in the upper panel. The VIX is a real-time index that represents the market’s expectations for the relative strength of near-term price changes in the S&P 500.

The highlighted ellipse in the lower panel shows that the VIX has been above 24.00 since Apr 22nd, which has closely coincided with the most recent stock market decline, and has been hovering right in top of 24.00 for the past four sessions. We view the 24.00 area as the line of demarcation between a bearish trend or a Tactical buying opportunity in the S&P 500. It would take a sustained decline below 24.00 to further confirm there is a significant market bottom at the S&P 500’s May 20th low.

S&P 500: The Key Level To Watch

The next chart plots the S&P 500 daily since 2021 along with its 200- and 50-day moving average, widely watched major and minor trend proxies. The lowermost red highlights show that the index has been testing overhead resistance at 4115 to 4157, which represents the February 24th and March 8th lows, for the past eight sessions. The market clearly “sees” this level as being important, and we see it as the probable starting point of the index’s next Tactical move — either up or down.

It would take a sustained rise above this resistance area amid a sustained decline below 24.00 in the VIX, as shown in the chart above, to indicate that a more significant bottom is in place at the S&P 500’s May 20th low. However, if the 4115-4157 level continues to contain the index on the upside while the VIX remains above 24.00, it will suggest that the current stock market downtrend is still intact and may be resuming.

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