There is still plenty of bullish contrarian potential
“Last week’s breakout will be more convincing going forward if the daily lows are above previous highs from early last week. As we move into December, the SPX is very much on the path to my 6,200-6,215 year-end target, derived from a mid-September inverse ‘head and shoulder’ breakout.”
- Monday Morning Outlook, December 2, 2024
Momentum is about the only way to describe the S&P 500 Index’s (SPX--6,090.27) price action, whether you are looking back to the September low or the time frame since the election. Pullbacks of any kind have been brief and shallow, and efforts to take out prior highs and/or key round numbers have not lasted very long.
In fact, by Monday's close, the SPX’s breakout above its mid-November high had already looked more convincing, with the full candle (high, low, and close) above the previous high. The SPX is now 125 points, or 2%, below the 6,215 yearend target that I suggested was possible right after the mid-September inverse “head and shoulder” Fed rate cut driven breakout above the 5,650-5,665 area that defined the neckline.
In other words, buyers have stepped in at a steady pace following a clear bullish technical pattern that occurred immediately after a monetary event (rate cut). Plus, uncertainty is being lifted in relation to the November elections, which has generated a more favorable business outlook.
Per the SPX chart above, the momentum off the September low is clearly visible, with another all-time closing high posted on Friday. A potential resistance or hesitation level is 50 points above at 6,143, which is exactly 20% above the early-August intraday low. And SPDR S&P 500 ETF (SPY--607.81) call open interest (OI) adds up to over 150,000 contracts at the 515-strike. This corresponds to 6,150, so one might consider 6,143 as a potential profit-taking zone and 6,150 as potential option-related resistance during the next two weeks.
If you are anchoring to the closing low in early August, the 6,223 level is exactly 20% above this low, in the vicinity of my year-end target.
But there are multiple potential layers of support if buyers go on strike at or just above current levels. The 6,050 level is the first potential source of support, which was last Tuesday’s close prior to Wednesday morning’s gap higher.
Below the first level of support is the 5,990-6,015 area. The 6,015 level is the site of the Nov. 11 high and the 20-day moving average is at 6,090 and supported the low after that Nov. 11 short-term high was in place.
Turning to the sentiment backdrop, I mentioned last week that option buyers were optimistic, representing a risk, but a risk that is downgraded until there is evidence of technical weakness that no longer justifies the optimism.
In fact, amid the SPX’s all-time high and no evidence of technical weakness, equity option buyers on SPX component stocks have become even more optimistic, with the buy (to open) put/call volume ratio plunging below recent troughs.
For perspective, the current 0.45 reading in this ratio is above the five-year low of 0.35 in July 2021. As such, the direction of this ratio is bullish, especially if the 0.35 reading is in store in the weeks ahead. But again, if a technical breakdown occurs, this ratio will be more apt to turn higher and set the stage for a corrective move. As of Friday, we don’t see a red flag from this perspective.
And while equity option buyers on SPX components are bullish, we are seeing evidence that there is a desire among some to fade this momentum, which is indicative that there could be sideline money that keeps the momentum alive. For example, I measure the sentiment among short-term speculators that trade SPY options by observing five-day OI changes on weekly options. The five-day open interest changes on just-expired weekly 12/6 SPY options continue to show a preference for puts, suggesting that there is a good number of short-term traders expecting a pullback in the broad market. In other words, this is bullish in the context of the current price action.
Finally, early last week, short interest data from the exchanges was released as of mid-November, about a week after the election and the bullish price action that followed.
To my surprise (again), and per the chart below, in that two-week period between reports, there was a 3.5% increase in short interest on SPX component stocks to a 2024 and multi-year high.
In context of the huge rally in 2024, the shorts continue to bet against the underlying trend. As such, comments I made earlier this year stand true today: “This is a highly shorted market, which has bullish contrarian implications in context of price action.”
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