As cash levels rise, expectations for the economy and earnings plummet
“ …the SPX ended the week right around its 36-month moving average -- a trendline that has proven significant historically, as it has provided support on numerous pullbacks through the years, but has signaled more selling on the horizon after breakdowns. This trendline is currently at 2,773, while immediately above resides the 2,800-century mark, which is also in the vicinity of a 50% retracement of this year’s closing high and low. As I alluded to on Twitter on Thursday morning, 2,800 has served as resistance in the past, namely the fourth quarter of 2018, which many bulls would like to forget.”
- Monday Morning Outlook, April 13, 2020
Coming into last week at potentially key resistance levels, bulls kept the pressure on bears, as the S&P 500 Index (SPX - 2,874.56) rallied and posted its third weekly gain in four weeks. In the process, it took out another layer of potential resistance that I discussed last week, closing above its historically-significant 36-month moving average and the 2,800 level, which marked the peak prior to a huge correction in December 2018, and is also in the vicinity of a 50% retracement of this year’s closing high and low.
With the SPX 23% above its March closing low but still 16% below its February all-time closing high, the bears are pinning their hopes that an area between 2,900 and the 3,000-millennium level prove to be harder to overcome than the levels I mentioned last week as potentially dangerous.
Between 2,900 and 3,000, there is potential resistance from:
- 2,907: this is coincident with the round -10% year-to-date (YTD) return and vicinity of the 2,900-century mark. (In 2019, the +10% YTD return marked brief resistance in February and support in early March and early June)
- 2,940: 320-day moving average (support in May 2019 and brief support at the end of February) Also, resistance in the fourth-quarter of 2018 and April-June 2019
- 2,948: 61.8% Fibonacci retracement 2020 of its closing high and low and half-century mark
- 3,000: round millennium level
- 3,012-3015: site of declining 80-day and flattening 200-day moving averages
With the SPX at roughly 2,874 as of Friday’s close, it's in no-man’s land from a short-term technical perspective, as a wide area between 2,630 and 2,800 represents potential support.
- The 2,800 area is now a possible support zone – round century mark, former resistance in 2018, and a 50% retracement of this year’s closing high and low
- 2,776 is site of the 36-month moving average
- 2,684 level is 20% above the closing low, which some use as the level putting the SPX back in bull mode …. This is odd because when it crossed below 2,708, 20% below its closing high, it was in bear mode, implying a level below 2,708 means a bull market has arrived.
- 2,664 is four times its 2009 low
- 2,630 is the SPX’s 1,000-day moving average, which marked the December 2018 low
Admittedly, there are a wide range of levels I am seeing as potentially important, and with volatility expectations still relatively high - the Cboe Market Volatility Index (VIX - 38.15) closed at 38.15 last week - the various support and resistance levels can come into play fairly quickly. But the technical backdrop has improved markedly during the past few weeks, especially from a longer-term perspective, with the SPX rallying late last month to close back above the important 80-month moving average before retaking its 36-month moving average last week.
“…you should not be strongly defensive after the last month’s rebound closed above its 80-month moving average, which remains an encouraging sign, especially if I am correct in that most fund managers moved into a hugely defensive position in just a matter of weeks.”
- Monday Morning Outlook, April 13, 2020
“BofA Poll Shows ‘Extreme’ Investor Pessimism With Cash at 9/11 High”
“Equity allocation in global survey is lowest since 2009 crisis”
“Record 93% of investors expect global recession in next year”
- Bloomberg News, April 14, 2020
“Big Gains in Havens Stoke Worries About Stock-Market Pullback”
- The Wall Street Journal, April 17, 2020
“Guggenheim’s Minerd: S&P 500 Could Sink to 1,200”
“Recovery forecast ‘weakest ‘V’ I’ve ever seen,” Morgan Stanley economist”
- CNBC April 17, 2020
Turning to the sentiment backdrop, last week I discussed at length how pricing in the options market indicated that fund managers have likely moved into a very defensive position. From a contrarian perspective, when this group is holding a lot of cash, it is a positive, as it represents sideline money that can keep declines in check or fuel the market through resistance levels.
The defensive posturing was confirmed by results released by Bank of America (BAC) in their monthly fund manager survey, which indicated the highest cash position in years. And per the various headlines I pasted above from multiple news sources, the high cash levels are supported by expectations for the economy and earnings that have literally plummeted. Low expectations should be viewed as a positive, as a low bar is easier to hurdle than a high bar.
The extremely low expectations are important, as the number of companies releasing earnings (and maybe outlooks) in the next few weeks gathers momentum. As it stands now, with the SPX back above major long-term moving averages that have been supportive during bull markets and above a trendline connecting higher lows since 2009, the VIX below half its 2020 closing high, and recession expectations essentially a “sure thing” amid depression-type forecasts for the economy, the outlook favors the bulls, as current price action suggests worries could be overdone amid massive stimulus efforts by the Federal Reserve.
The Fed continues to be a wild card. On Friday, it indicated that next week it would be scaling back on its bond buying and mortgage-backed security purchases. Will the markets be able to handle this move? This is an immediate risk to bulls in the next week. But if there is at least stability in the markets amid less support from the Fed, it should be viewed as another positive.
Todd Salamone is Schaeffer's Senior V.P. of Research
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