Conclusion, Investment Implications, Strategy
With about 90 minutes left in today’s trading, the benchmark S&P 500 (SPX) is testing primary Tactical support near 4545 for the second consecutive session. This is where the current 2021 advance should resume if still valid. And, as expected, this has triggered the Pavlovian “buy the dip” response that has characterized the US broad market index this year. We are closely watching this support level, in conjunction with market volatility and investor asset flows, to try to determine — as quickly and accurately as possible — whether the current market decine is just another minor pullback within a major uptrend or the beginning of a real, and long overdue, corrective decline.
Introduction
As of the close on Tuesday, Nov 30th, our Asbury 6 risk management model (Table 1 below) turned Negative and our Correction Protection Model wealth preservation tool shifted to Risk Off status. What we don’t know yet is if this is just another one of the many minor pullbacks that we have seen during 2021 or the beginning of a meaningful correction. We are watching many different indicators try to determine this as soon as possible, but three of them stand out as being particularly important.
Table 1
#1) Price: Primary Tactical Support in the S&P 500
Chart 1 below plots the S&P 500 (SPX) daily since April along with its 200- and 50-day moving averages, which are widely watched major and minor trend proxies. The blue and green highlights identify 4546 and 4543 as the Sep 2nd benchmark high and the 50-day MA. This is primary Tactical support and it is currently being tested.
Chart 1
This 4546 to 4543 area must be definitively broken to the downside for the current market decline to change from being just a minor pullback to a real correction, the latter which we haven’t seen since the one in early 2020 that took the S&P 500 35% lower in about two months. The 50-day MA average is also where the market has trained investors to “buy the dip” nine times this year. If this support area is indeed going to hold again this time, it would take a sustained rise above SPX 4630 to 4655 to confirm that the larger market advance has resumed.
#2) Volatility: The CBOE Volatility Index (The VIX)
The lower panel of Chart 2 below plots the VIX daily since May with its 21-day moving average, the latter which indicates the monthly trend. A rising VIX indicates increasing investor fear. A declining VIX indicates investor complacency. The upper panel displays a corresponding chart of the S&P 500.
Chart 2
The green highlights show that 6 previous rises to and quick declines from a 24.00 or higher reading in the VIX coincided with the past 6 near-term bottoms in the S&P 500. The rightmost red highlights, however, show that the VIX has now been above 24.00 for the past 5 sessions. Simply stated, we are closely watching 24.00 in the VIX as a line of demarcation between a market pullback, during which the VIX would quickly decline back below 24.00, or a correction in which the VIX would remain above 24.00. For perspective, the VIX rose and remained above 24.00 on Feb 25th 2020.
#3) Asset Flows: The SPDR S&P 500 ETF Trust (SPY)
Chart 3 below plots the S&P 500 daily since July in the upper panel, with a corresponding chart of the total net assets invested in SPY in the lower panel. Investor asset flows measure investor conviction in a price move. This data series measures monthly investor conviction, or the lack of it, in the US broad market via a 21-day (monthly) moving average (our Tactical time period).
Chart 3
A quick look at the chart shows that periods of monthly asset expansion coincide with (“fuel” is more accurate) a rising S&P 500, and monthly contraction coincides with a declining SPX. The rightmost red highlights show that these assets have been in a trend of monthly contraction since Nov 22nd, which is Tactically negative for the market. It would take a shift back to a trend of monthly expansion in these assets, as most recently occurred between Oct 14th and Nov 21st, to indicate that enough bullish conviction has returned to the marketplace to support the resumption of the S&P 500’s larger 2021 advance.
The chart also shows that these assets are closing in on a test of $409.7 billion AUM (assets under management), which is the Sep 16th previous all-time peak. Our research shows that these previous peaks in AUM are just as important to future price direction as previous highs in price are — and actually, often lead price movement. Thus, we will be closely watching how these assets react to the $409.7 billion level in the days and weeks ahead to hopefully get a confirming if not an early indication of whether primary Tactical support at 4546 and 4523 will hold or be broken, the latter which would clear the way for a much deeper US broad market decline.