“…judging by Friday’s close, it might be considered more of a victory for bulls than bears. While the SPX moved below many of the key levels mentioned above on an intraday basis, the end-of-week closes were above those levels, including the previous all-time high in March at 4,254. In fact, Friday’s bullish “hammer” candle looks like the early May “hammer” that occurred prior to a two-week rally…”
– Monday Morning Outlook, June 3, 2024
“There may be hesitation among buyers and sellers ahead of Wednesday’s Federal Open Market Committee (FOMC) meeting, as sideways-to-slightly-lower stock prices have generally preceded FOMC meetings this year, with buyers stepping in post-meeting.”
– Monday Morning Outlook, June 10, 2024
The S&P 500 Index (SPX — 5,431.60) has followed the historical script over the past two weeks, with a two-week rally following a bullish hammer candle on May 31. Price action since that hammer mirrors that of a bullish hammer candle on May 2, when the SPX was flirting with support from a multitude of perspectives.
The SPX’s price action ahead of and after Wednesday’s Federal Open Market Committee (FOMC) meeting followed the script, too, with the SPX flatlining ahead of the meeting with support at the intraday high, and buyers stepping in on FOMC day.
Admittedly, the buying had more to do with May’s lower-than-expected consumer price index (CPI) reading ahead of the open than the FOMC meeting itself. An updated dot-plot revealed most governors see between one and two rate cuts by the end of the year. This was not a huge surprise, as market participants have been adjusting to the reality of a “higher for longer” interest rate environment for months.
For instance, the first rate cut was expected in March, after December’s CPI number was released in mid-January. Federal Reserve Chairman Jerome Powell began pushing back on the timing of an expected rate cut in late January, however. This has been an ongoing theme that investors have seemingly grown accustomed to.
In the event of a SPX pullback, the May intraday high and pre-FOMC/CPI support at 5,340 represents the first level of defense. The SPX’s advancing 30-day moving average, which I have discussed in prior commentaries given its significance since late last year, is a moving support level as time passes. It comes into the week at 5,291 and is rising approximately 13 points. It could be around 5,340 by week’s end, which is coincidentally the site of the May intraday high.
A resistance area is exerting itself just overhead at 5,440-5,445. After the SPX gapped higher on Wednesday, it reached this level in the first two hours of trading. But since Wednesday morning, despite efforts to push above this level on multiple occasions into Friday’ s close, sellers prevailed. They did not show a lot of dominance, though, as the index went flat from Wednesday morning into the Friday close, with neither bulls or bears exerting control after the CPI reaction.
If I were to share only one chart that caught my eye this week, it would be the graph of SPX component short interest overlayed with SPX price action, after short interest data as of the end of May was released last week.
The second half of May weakness may in part be explained by the shorts, who got aggressive as the SPX made new highs during this same time period. Per the chart below, short interest increased by nearly 4% from mid-May into the end of May.
There is a chance that many of these shorts are already underwater, though this is not a guarantee. Since the SPX’s recent low, its advance/decline line has been retreating, suggesting fewer stocks participating in the rally that has been led by large-cap technology.
However, total short interest on SPX components is up more than 10% in 2024, and thus covering could lend support to stocks pulling back or fuel a rally in instances shorts get squeezed. Total SPX component short interest is now at a more than three-year high, which should be encouraging for bulls.
Note in the graph below that total short interest on SPX components was at a multi-year low going into 2022, a year in which the SPX struggled as shorts built up positions from that short interest trough and as stocks weakened.
“… continue to monitor the Cboe Volatility Index (VIX – 12.22) reading. It may rise slightly into Wednesday’s FOMC meeting, but moves to prior lows have generally been resolved with pullbacks of varying degrees in the equity market and a rise in volatility expectations. The May low occurred in the 11.52-11.85 area before the VIX eventually peaked at 14.88.”
– Monday Morning Outlook, June 10, 2024
With Friday being a down day for the SPX, the weakness throughout most of the day may not have come as a huge surprise to those following the Cboe Volatility Index (VIX — 12.66). Note that at Thursday’s close, it was sitting at its prior lows.
When it gets to this level, just below 12.00, the SPX has tended to struggle in the near term. However, SPX pullbacks and VIX pops from this level have not been as alarming. If you are looking to hedge long portfolios, VIX pullbacks to prior lows may be a worthwhile time to do so.
Todd Salamone is the Senior V.P. of Research at Schaeffer’s Investment Research.
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