As the market heads into the last day of the quarter and month, last week’s impressive new high for the S&P 500 and the Nasdaq 100 has surprisingly gotten a mixed reaction. This is probably due to the view that the V-shaped rally from the April lows is hated by many. This view was again voiced this morning by Fundstrat co-founder and managing partner, Tom Lee.
The high level of bearish sentiment at the April lows caused a large amount of selling near the lows. The early stages of the market rally in late April and early May did not convince the market bears to get back into the stock market. Even as we got within 3-5% of the old highs, the skeptics did not change their view.
The weekly Spyder Trust (SPY) shows the close above the prior all-time high, line a. As the selling continued in March, SPY closed below the yearly pivot at $549.88 as SPY dropped below the weekly starc- band. This was a sign that SPY was deeply oversold as it had reached a low-risk buy, high-risk sell zone. Four weeks later, SPY closed back above the yearly pivot.
The S&P 500 Advance/Decline line had corrected from the July 2023 high (line b) as the downtrend in the A/D line was broken by early November 2023.. This was a sign that the correction was over, and I favored joining the bulls, not the bears.
This was subsequently followed by the 2nd Zwieg Breadth Thrust signal of the year, after a signal was also generated in March. This last occurred in 1962. As I mentioned at the time, “According to the Carson Group and Ned Davis, past signals have averaged a solid twelve-month gain of 23.3% in 100% of the instances since 1945.”
Aside from the one-week drop at the end of 2024, the A/D line has stayed above both its weekly and monthly WMA since November of 2023. The weekly S&P 500 A/D line did form a lower high in February while the SPY and S&P 500 made new highs. The divergence was not confirmed as the A/D line did not drop below the late 2024 low. The new high for the S&P 500 A/D line projected a new high for SPY.
At the bottom of the chart is the difference between the bullish % and the bearish % from the American Association of Individual Investors (AAII). The AAII Bull%-AAII Bear% peaked above 20 just after the election, which meant there were 20% more bullish investors than bearish investors.
By early 2025, this indicator was below its WMA and in a clear downtrend. It dropped to -40 in late February and stayed mostly below -30 until early May. This meant that there were 40 or 39% more bearish investors than bullish.
For reference, it reached -51.4% at the bear market lows on March 5, 2009, which was the lowest reading since the recession of 1990 when it reached -54%. In watching this survey each week, it was the bounce in the bullish % to 29.4% from 20.9% on May 7th that convinced me that the sentiment and the market had turned.
The Invesco QQQ Trust (QQQ) has been a favorite since March 2023 as the monthly relative performance (RS) moved above its WMA. This signalled that QQQ was a market leader versus the SPY. At the end of 2022, the RS had dropped below its WMA, indicating that QQQ was going to be weaker than the SPY. In 2022, SPY was down 18.2% while QQQ dropped 32.6%, confirming the signal.
QQQ was up about 6.4% in June as the chart has the next resistance at $567.18 with the monthly starc+ band at $593.95. The July pivot is at $539.94 with the new monthly R1 at $564.50. The rising 20-day EMA and short-term support now at $532.79.
The Nasdaq 100 Advance/Decline line staged a major upside breakout at the end of 2023, line a, as two-year resistance was overcome. The A/D line has made a series of higher highs since the breakout and will close June at another new high. The monthly RS dropped briefly below its WMA in February and March before surging back above the WMA in April, signaling that QQQ was still a market leader.
The bullish action of the S&P 500 and Nasdaq 100 A/D lines, which both made new highs on the June 30th close does favors a positive outlook for the 3rd quarter. Before the end of July, a deeper pullback is likely as the bearish sentiment is still quite high.
I would suggest monitoring the monthly pivot levels and 20-day EMAs to be sure you are not buying too high or selling too low. These indicators can be helpful when you are buying the dips.