“Friday was an ugly candle if you are a bull, but the good news is that buyers came in around the mid-November and early January highs. It never tested other potential levels of support, such as the pre-Inauguration close of 5,996… Sentiment remains a mixed bag, with SPX component option buyers still displaying optimism and active investment managers nearly fully invested just ahead of selloff late last week…The mixed sentiment picture might be creating the market churn we have experienced the past several weeks. As such, continue to key to resistance and support levels discussed earlier in the commentary.”
-Monday Morning Outlook, February 24, 2025
The excerpt above gives you a glimpse into the technical and sentiment backdrop going into last week’s trading. Price action had not been exactly inspiring in prior weeks – a volatile churn - but the S&P 500 Index (SPX -- 5,954.50) continued to show a little bit of resilience, stubbornly holding short-term support levels.
The sentiment picture was a mixed bag, as I had been suggesting for weeks. In other words, one cannot be totally shocked by the selloff that drove the SPX below support levels, given that active investment managers were nearly fully invested and not exactly a huge source of buying power. Plus, equity option buyers were still at optimistic extremes, positioning of which usually ends poorly for bulls (in this particular instance, it took longer than usual for this group to be caught on the wrong side of the big move).
That said, the short covering potential on SPX components and some evidence of skepticism amid retail investors and investment advisers suggested the bulls could retain control.
But by the end of the week, the bears had their day as the Feb. 25 close below multiple potential levels of support – the 50-day moving average, short-term peaks in November and January, the pre-inauguration close at 5,996, and a breakout level above a trendline connecting lower highs from mid-December into January – indicated more pain to come.
“A reversal of the S&P 500’s post-election rally would spark investor expectations for intervention by President Donald Trump to support the market, according to Bank of America Corp. strategists…The Nov. 5 closing level is the ‘first strike price of a Trump put, below which investors currently long risk would very much expect and need some verbal support for markets from policymakers,’ BofA’s Michael Hartnett wrote in a note”
-Bloomberg, February 28, 2025
So now what?
After the SPX’s impressive 20% rally from the early August low to an all-time high in February (a span of five months), there are multiple lines in the sand that could be supportive, even after key short-term and intermediate-term levels break down.
As such, for some of you that look in detail at the SPX chart I post weekly, it makes sense why the excerpt above resonated with me, as the green horizontal line marking the Election Day close on Nov. 5 at SPX 5,783 has been a fixture on the chart. This is because of its potential importance with a president that in his first term referenced the stock market numerous times as a barometer of the state of the U.S. economy.
In fact, the March 2020 Covid-19 SPX low occurred in the vicinity it was trading when President Donald Trump took office in January 2017 (there was one close below this level). Coincidentally, or perhaps not, the government took extraordinary measures around the time of the March low to prevent a collapse in the economy due to the pandemic.
The SPX broke below the level when Trump took office in January of this year, but one can key on the pre-election close before the SPX gapped higher on news of President Trump's victory in early November as another area of potential support, since Trump and his administration could be keying on this level, too.
For bulls, hopefully the 5,783 level Election Day close that already marked support in mid-January does not come into play.
In fact, Friday’s low at 5,837 was just five points above the SPX’s 2024 close at 5,832, and was established prior to an intraday rally that created a bullish candle that looks the opposite of the previous Friday’s bearish candle.
Additionally, Friday’s low occurred at an extension of the trendline connecting lower highs from mid-December into January. But bulls do not want to see this trendline come into play again, since it slopes lower as time passes. For what it is worth, this trendline will converge with the Election Day close on March 17.
But keep in mind that support levels that had previously kept declines in check since late January are now potential resistance levels between 5,975 and 6,015.
One group that is showing a shift in sentiment in response to the selloff last week is equity option buyers on SPX component stocks. This is the group that is usually wrongly positioned at key turning points.
Since early December, this segment of market participants was at an optimistic extreme, as measured by the low level of put buying (a bet on an equity to decline) relative to call buying (a bet on a stock moving higher) on SPX components. The SPX chopped around for weeks as this group remained optimistic, before finally selling off sharply the past couple of weeks. The SPX is now sitting below its early December high.
Per the chart below, note that the buy-to-open put/call volume ratio on SPX components spiked last week. The risk to bulls is the spike being in its early stages, as equity option buyers shift to a more bearish posture. A sustainable shift to more put buying relative to call buying creates a headwind for individual equities and collectively for the market. The 10-day average of this ratio is currently 0.53, up from a multi-year low of 0.45 early this year. Extremes in pessimism, which are usually concurrent with key troughs, historically range between 0.70 to 0.90.
If the SPX cannot continue higher from Friday’s low and take out resistance in the 5,975-6,015 zone, I would expect that this ratio will continue higher, coincidentally creating a headwind.
With the above said, the SPX is only 3% below its February all-time closing high, with most of the significant damage limited to momentum names. New short interest data as of mid-February came out last week and the potential for short covering is another sentiment data point that could limit the downside on selloffs like we have experienced the past two weeks.
Per the second chart below, note that short interest on SPX components hit another multi-year high, with a near 6% build in total short interest in the first half of February. If the shorts press their bets, this could be a headwind. But there is large contingent of shorts that are in the red and may view pullbacks like this as an opportunity to cover and limit their losses.
With the SPX the most oversold since early August, according to its 14-day Relative Strength Index (RSI), the shorts could look to cover on Friday’s pullback to the 2024 close, which is coincidentally an area where buyers emerged in mid-November, mid-December, and early January.
Todd Salamone is Schaeffer's Senior V.P. of Research
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