US Stock Market At A Strategic Decision Point, Leaning Lower

The Bottom Line

The US stock market is at a multi-quarter decision point as investors try to determine whether a robust economy and strong jobs market are enough to to overcome the adverse effects of rapidly increasing inflationary pressures amid a less accommodative Federal Reserve. Specifically, the benchmark S&P 500 (SPX) begins this week sandwiched between 4619 and 4444, a critical price window that is likely to become the springboard for the US broad market index’s next Strategic (quarterly) trend. 

The current Risk Off/Negative status of our tactical models favor a bearish resolution to this major decision point, but it would take a sustained rise above 24.00 in the CBOE Volatility Index (VIX) to corroborate and help confirm it.

Last Week’s Takeaways & This Week’s Key Levels

The benchmark S&P 500 (SPX) finished Friday’s session at 4501, up 69 points or 1.6% for the week. However, despite the recent sharp rebound from formidable underlying support at 4729-4238, the US broad market index is still down 226 points or 5.6% for 2022.

Chart 1 below shows that SPX finished last week above its 200-day moving average at 4444, which is major underlying support, but it also finished below its 50-day MA at 4619, which is minor overhead resistance. These two levels are the most important ones to watch next week. 

Moreover, we view the territory between them as kind of a “no man’s land” and a critical Strategic (quarterly) decision point for the US broad market, from which either 1) the 2021 major uptrend resumes or 2) a much deeper corrective decline emerges.

The Asbury 6: Negative As Of January 14th

Table 1 shows that, through Friday Feb 4th, four of the Asbury 6 constituent metrics remain negative (red). The “A6” model itself has been on a Negative status since January 14th. The S&P 500 has declined by as much as 9.5% since then.

The Asbury 6 is my firm’s tactical risk management model. It was designed to help investors determine what the real day-to-day condition of the market is in an environment where computer driven trading, which dominates daily stock market volume, has made investing in equities much more nerve-racking and confusing. The model was built to put more emphasis on market metrics that go beyond the short term gyrations of the major indexes. Four or more metrics in one direction, either Positive (green) or Negative (red), indicate a Tactical bias.

It would take a shift back to green or Positive in the Asbury 6 to indicate market internals are conducive to a resumption of the 2021 advance.

Watch The VIX This Month

The blue bars in the lower panel of Chart 2 plot the CBOE Volatility Index (the VIX) daily since September 2021 along with its 21-day moving average (one business month, our tactical time period) which is currently at 23.90. A corresponding chart of the S&P 500 is plotted in the upper panel. 

The colored highlights in the lower panel show that a high extreme of 24.00 in the VIX has been a line of demarcation between tactical buying opportunities in the S&P 500 (green) and more sustained declines (red). 

The VIX finished last Friday’s session at 23.22, just slightly below that 23.90 to 24.00 pivotal area. A sustained decline below 23.90-24.00 this week would be seen as being tactically bullish, and an early indication that SPX may be resolving the area between SPX 4619 and 4444 in a positive way to resume the 2021 advance. 

Conversely, a sustained rise above VIX 24.00 would be seen as Tactically bearish for the S&P 500 and an early indication that SPX may be in the midst of a bigger and more sustained market decline.

Conclusion

Even with the best data-driven information and tools, forecasting financial market direction is extremely difficult simply because market conditions change every day and no one can see the future. So the next best thing, and much easier to do, is to identify the key inflection points in the stock market where it has to make a directional decision. The US stock market is at such a place now. How the S&P 500 moves out of the 4619 to 4444 window, with confirmation by market internals and market volatility, is likely to indicate how investors have handicapped the current economic growth versus rising inflation environment conundrum and identify the beginning of the US broad market’s next one to several quarter trending move.