The S&P 500 Index (SPX) has entered a critical phase, breaking through all established support levels and dipping below its long-standing trading range since last November. With tentative support now sitting near 5,525 and additional support potentially at September’s lows around 5,400, investors are bracing for heightened volatility.
Oversold Market Conditions: A Buying Opportunity?
Despite being significantly oversold, SPX lacks confirmed buy signals. Historically, oversold markets can trigger short-lived rallies, but they often fizzle out before reaching the declining 20-day moving average, which currently stands at 5,900. If a rally does materialize, it could result in a short-term 300-point rebound.
A strong indicator of the market’s oversold condition is SPX’s positioning below the -4 modified Bollinger band (mBB). While this setup could eventually lead to a McMillan Volatility Band (MVB) buy signal, confirmation is still required. For that to happen, SPX must first close above the -3 band, signaling a potential shift in momentum.
Put-Call Ratios & Market Breadth Point to Continued Weakness
The equity-only put-call ratios remain on firm sell signals, consistently rising at a steady pace. A true buy signal will only emerge once these ratios roll over and begin trending lower.
Market breadth is also taking a hit, with “stocks only” breadth trailing behind New York Stock Exchange (NYSE) breadth. Both breadth oscillators remain deeply oversold, requiring at least two to three days of sustained positive breadth to transition into buy territory. Another key observation: The divergence between the two oscillators suggests an extreme oversold condition. If they begin to converge, it could trigger a short-term one-week buy signal.
NYSE New Lows Spike as VIX Signals High Volatility
New lows on the NYSE continue to dominate new highs, reinforcing the ongoing sell signal. On Wednesday, the NYSE recorded only 11 new highs—the lowest since April 2024, when the market was experiencing a correction. For this sell signal to reverse, new highs must outnumber new lows for two consecutive trading sessions.
The Cboe Volatility Index (VIX) remains elevated, keeping the VIX sell signal in place. However, a potential VIX “spike-peak” buy signal has emerged, with VIX reaching 29.57 on March 11 before closing more than three points lower on March 12. Previous attempts at this signal have struggled, raising doubts about its reliability in the current market environment.
Volatility Derivatives Signal Bearish Sentiment
The volatility derivatives market has taken a bearish turn, reminiscent of March 2020’s pandemic-driven market turmoil. The downward slope of both the VIX futures term structure and the Cboe volatility indices indicates a bearish sentiment for equities. The most concerning signal is the inversion of the two front-month VIX futures, with March trading 1.30 points above April at one point—previously reaching nearly a three-point spread earlier in the week.
Adding to the uncertainty, VIX is trading well above the 3-month VIX (VIX3M). Historically, when VIX returns below VIX3M, it signals a short-term one-week buy opportunity for stocks.
Final Thoughts: Navigating the Bear Market
At present, the only confirmed buy signal is the VIX spike-peak, though it has struggled to gain traction. While numerous oversold conditions are present, suggesting a sharp but temporary rally back toward the 20-day moving average, the broader trend remains bearish.
With the market potentially entering a bear phase, heightened volatility is expected. While a full-scale crash seems unlikely, traders should remain cautious. Until confirmed buy signals emerge, a prudent strategy would be to roll deeply in-the-money puts down to lower strikes and wait for more definitive market cues.
