Bulls Beware: Navigating a Volatile Stock Market for 2025
As we dive into the trading environment of early May 2025, trend-following traders should be on high alert. The stock market is exhibiting high volatility, but what does this mean for your portfolio? Let’s unpack the signals emanating from the S&P 500 (SPX) and analyze how to best position ourselves in these treacherous waters.
The Current State of the SPX
What started as an oversold rally in early April has blossomed into a series of buy signals, but hold your horses—this isn’t a full-throttle bull market just yet. The SPX has shown some bullish momentum, but its chart still carries a cautionary tone. Despite a recent uptick, the market’s volatility means that a bearish reversal could be just around the corner.
The SPX is presently trading above the downtrend line from February and March highs. However, significant resistance looms at the declining 200-day moving average, which hovers around the 5,750 mark. To truly flip the script to bullish, we would need to see a close above the pivotal 5,800 level. On the downtrend, we have potential support levels at 5,300, 5,100, and spikes down to 4,850. Notably, the recent GDP-related trading on April 30 created a short-term support level at 5,433 that may also keep the bulls in the game, at least temporarily.
Potential Buy Signals and Market Indicators
While the SPX chart presents a bearish undercurrent, a McMillan Volatility Band buy signal is looming on the horizon. The SPX closed above the -3
Additionally, the equity-only put-call ratios have taken a turn toward the bullish side. Both ratios peaked and began to decline, confirming the buy signals generated by our analytical computer programs. These signals are particularly strong since they are being produced while the ratios sit near the highs of their charts. Nevertheless, any surpassing of recent peaks in these ratios would trigger a stop to our new buy signals.
Market Breadth and Volatility Analysis
Despite some troubling signs, market breadth is positive for now. Both breadth oscillators are currently on buy signals and firmly entrenched in overbought territory—an encouraging sign when paired with the SPX’s upward movement. However, it would take at least two or three days of negative breadth to flip these oscillators back towards sell signals.
But hang on—realized volatility is skyrocketing, alarming for stock market stability. The 20-day historical volatility for the SPX is hovering around a staggering 50%. In contrast, implied volatility is showing signs of decline, with the Cboe Volatility Index (VIX) now hanging below 25. Although a ‘spike peak’ buy signal was issued on April 7, volatility tends to make the market a dangerous space ripe for quick shifts.
The VIX and Its Implications
The trend of VIX remains upward, casting a bearish shadow across the market. A sell signal for VIX would only be confirmed if it closes below its 200-day moving average for two consecutive days—currently just above 19 and still rising.
The term structures of VIX futures and other volatility derivatives have been uncharacteristically bearish throughout April. In a flourishing market, we’d expect an upward slope, yet it’s remained flat to down. Keep your radar on—the VIX futures term structure flatness signals underlying concerns about market health.
Strategy and Positioning Going Forward
In conclusion, as savvy traders, our strategic approach should lean toward retaining an out-of-the-money ‘core’ bearish position as long as the SPX chart reveals negative trends. Yet, we can play the confirmed signals around that bearish core. For now, focusing on trading those confirmed signals while maintaining a bearish stance could prove to be a tactical blend.
Let’s not forget the importance of being vigilant and agile in this highly volatile trading environment. Early May may pose challenges, but with careful analysis and smart positioning, we can harness the trending signals while safeguarding our investments. Stay sharp, traders; the market never sleeps!