What The Charts Say: 15 "Risks" To The Recent Rally

The stock surge from February is at risk, warns BofAML's Stephen Suttmeier as a plethora of bearish divergences could cap further gains from here. 2044-2022 are key nearby S&P 500 support for April, but a loss of 2022 is required to break the last higher low from 3/24 and suggest a deeper decline for the S&P 500. The following 15 risk-factors - from VIX term structure steepness to Dow Theory Sell signals - all point to a retest of the recent 1810-1820 lows.

The double bottom breakout point near 1950 is support ahead of the 1820-1810 lows. The 2067-2075 area highs could provide initial resistance ahead of 2085 (double bottom count) and the 2015 highs of 2100-2135.

Many indicators are flashing tactical bearish divergences that suggest that the rally off the Jan/Feb lows is close to its end. Many had bullish divergences (higher lows) at the Feb 11 low on the S&P 500 vs. bearish divergences (lower highs) as the S&P 500 trended higher into early April.
1. New highs for the S&P 500 advance-decline line but SPX EW vs. SPX and NYSE McClellan Oscillator say breadth momentum is diminishing.

Similar to the McClellan Oscillator, the S&P 500 equal-weighted vs. market cap weighted ratio (SPW/SPX) shows a bearish divergence (lower high for SPW/SPX vs. higher high for SPX). Bearish divergences on SPW/SPX suggest limited S&P 500 upside.

2. On-balance-volume and our Volume Intensity Model (VIM) bearishly diverge to place rally from February at risk.

Similar to our Volume Intensity Model (VIM), on-balance-volume (OBV) shows a bearish divergence off the late-March and early-April S&P 500 highs. This is similar to the divergence in late October and early November 2015.

3. The VXV/VIX & the 25-day put/call ratios have shown complacency and are near levels where the S&P 500 typically has had trouble sustaining rallies. The 25-day put/call hit levels associated with the November and May 2015 highs.

A bullish divergence for the VXV/VIX coincided with the Jan/Feb lows and moving into early April, the VXV/VIX has a lower top vs. higher highs in the S&P 500 to set up a bearish divergence. The VXV/VIX reached the overbought zone above 1.20, hitting the highest reading since March 2015. The S&P 500 has generally struggled on these extreme contrarian bearish readings in the VXV/VIX, which is a risk factor.

 The CBOE 25-day total put/call ratio has dropped back to the lowest or most complacent levels seen since the S&P 500 highs in early-November at 2116 and late-May 2015 at 2135. This is contrarian bearish with the 25-day put/call reaching 0.93 on March 28 vs. 0.94 in early November and 0.92 in late May. This low put/call ratio is an April risk factor.

4. Daily MACD bearish diverges and triggers a sell signal at 1998-2000 overbought levels.

An overbought sell signal and bearish divergence for daily MACD are warning signs for the rally off the February low. Violent swings in the S&P 500 have pushed daily MACD to oversold extremes similar to 2011 as well as to overbought extremes similar to 1998-2000. Daily MACD is back at these overbought extremes. It took two months for daily MACD to go from oversold to overbought moving into both early November and late March. Investors have moved from the bearish side of the boat to the bullish side or the boat, but the boat has not yet tipped in either direction as the S&P 500 remains range-bound between the 1800 and 2100 areas.

5. A bearish breakdown/retest pattern on S&P 500 VIGOR is an intermediate to longerterm risk factor.

The US 15 Most Active Advance-Decline (A-D) line is a daily cumulative A-D line of the top 15 most heavily traded stocks in the US by share volume. When this A-D is rising, breadth for the most heavily traded stocks is bullish and reflects accumulation or buying. When this A-D line is falling, breadth for the most heavily traded stocks is bearish and reflects distribution or selling. The US most active A-D line broke down late last year and is retesting this breakdown, which is a bearish set-up.

6. A breakdown/retest pattern is a bearish set-up for the most active A-D line. The most active A-D line broke down in late 2015 and breakdowns in 2000 & 2007 preceded SPX breakdowns. This is a warning.

Big breakdowns in the most active A-D line preceded with big breakdowns for the S&P 500 in 2000 and 2007. Moving into 2016, the Most Active A-D line has a big top breakdown in place and we view this as a risk to the cyclical bull market that began in 2009.

7. The Dow Theory Sell Signal intact. Transports show a bearish non-confirmation vs. Industrials moving into April.

8. Monthly MACD remains on a sell signal from last March.

9. Bullish seasonals in April (& 2Q) even after a strong March, but May-Oct is the weakest 6-month period of the year.

10. A rise off extreme lows for net free credit (free credit balances in cash and margin accounts net of the debit balance in margin accounts) could exacerbate an equity market sell-off.

Net free credit is free credit balances in cash and margin accounts net of the debit balance in margin accounts. As of April 2015 net free credit stood at a new record low of -$227b vs. the February 2016 reading of -$148b and the prior record low from August 2014 of -$183b. Similar increases in net free credit in 2000 and 2007 coincided with market peaks and deeper pullbacks. If the market drops and triggers margin calls, investors do not have cash in their accounts and would be forced to sell stocks or get cash from other sources to meet the margin calls. In our view, this would exacerbate an equity market sell-off.

11. The high yield market remains a risk – both the US high yield index (H0A0) and S&P 500 are into resistance. High yield OAS has similar pattern to early 2008, just before the depths of the financial crisis, and may widen further.

The Barclays US Corporate High Yield Average OAS has widened out of a 3-year bottom. The last time this high yield spread widened out of a similar bottom was late 2007/early 2008 when the spread completed a 4-year base. The narrowing of the OAS off the February peak is similar to that of 2008, a pullback after a breakout, which was followed by further widening out in the OAS and deeper weakness in US equities. We view this as a US equity market risk for 2016. A move back below 5.50-5.30 is needed to call this view into question.

12. Speaking of Financials, they are not acting as leadership and are hitting new relative lows in the US and across the global. New all-time relative lows for Japan Financials. This is potentially bearish for global financial markets.

13. NASDAQ 100 leadership at risk and suggests that “Generals” have begun to follow the “Troops”. Big gap resistance from January on the NDX is holding so far. We prefer the 2016 Dogs of the Dow, which have emerged as 2016 market leadership.

14. A Bearish January Barometer.

Does the January Barometer work? Based on S&P 500 data going back to 1928, January is a reasonably good predictor of the year. When January is up, the year is up 80% of the time with an average return of 13.0% and February- December is up 78% of the time with an average rise of 8.6%. When January is down, the year is up only 42% of the time with an average drop of 1.8% and February-December is up 58% of the time with an average rise of 2.1%. This compares to positive annual returns 66% of the time and an average return of 7.4% for the S&P 500 going back to 1928. February-December is up 70% of the time with an average gain of 6.1% going back to 1928. With the first five sessions of January down, the average return for the year could be between -2.2% (if the month of January is down)

15. 2016 is a Presidential Election year. The average return for an Election year with a non-1st term President is -3.2% vs. 14.1% in an Election year with a 1st term President and 7.6% for all Presidential Election years.

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But apart from that, stocks are cheap and fundamentals are strong... oh wait