With the CBOE Volatility Index VIX well off its highs, the stock market has rebounded back to life.
After falling more than 36% from peak to trough in just a few weeks, the S&P 500 is up 20% from its lows. By technical definition, that's the minimum to qualify for a new bull market.
But most investors would likely agree that this doesn’t feel like a bull market. Nor does the likely onset of a recession - defined as two consecutive quarters of negative GDP growth - exactly signal that investors should be buying stocks aggressively.
Remember, long-term stock market investors are winners. On an annual basis, the stock market wins more than it loses, and on average the up years trump the down years.
With that being said, I would look at this rally with quite a bit of caution.
Traders can’t get bogged down in their stubbornness. If the market wants to go higher, it will go higher regardless of any one individual's opinion. The same applies to the downside.
Investors are trying to figure out whether this is a dead-cat bounce or the markets are looking to repeat a low similar to that of Q4 2018, when we had a V-shaped recovery.
Breaking Down the S&P 500
It’s also worth mentioning some of SPY’s top holdings, which are very tech heavy. Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report and Apple (AAPL) - Get Apple Inc. (AAPL) Report make up more than 9.5% of the fund. Amazon (AMZN) - Get Amazon.com, Inc. Report, Facebook (FB) - Get Facebook, Inc. Class A Report and Berkshire Hathaway (BRK.B) - Get Berkshire Hathaway Inc. Class B Report round out the top five.
Other top holdings include JPMorgan (JPM) - Get JPMorgan Chase & Co. (JPM) Report, Johnson & Johnson (JNJ) - Get Johnson & Johnson (JNJ) Report, Visa (V) - Get Visa Inc. Class A Report and Alphabet (GOOGL) - Get Alphabet Inc. Class A Report (GOOG) - Get Alphabet Inc. Class C Report. (SPY has a 1.65% weighting for both classes, which if counted together would send Alphabet into the top five.) Together, these nine companies (10 stocks) make up 23.9% of the ETF.
Microsoft, Apple, Facebook, Alphabet, JPMorgan and Johnson & Johnson are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells MSFT, AAPL, FB, GOOGL, JPM or JNJ? Learn more now.
Trading the S&P 500
Above is a five-year weekly chart for the S&P 500. Unfortunately, both the decline and the rebound have been very rapid. In other words, a lot of investors have been caught on the wrong side of the move or paralyzed with fear as market volatility creates violent price swings.
Fortunately, we have levels to measure against.
The S&P 500 index is rebounding from its lows near 2,200, as it runs into the underside of the 200-week moving average and the 38.2% retracement for its 52-week range (which also happens to be the 2020 range).
If the index can reclaim this mark near 2,350, then it puts the 100-week moving average and 50% retracement near 2,780 in play.
Ultimately, the bulls want to see the index reclaim key levels, hold them as support on pullbacks and continue higher.
On the downside, the bulls will want to see the 2,400 level hold as support, which was a significant breakout point in 2017 and notable support during the Q4 2018 selloff.
Below that puts 2,200 in play, which is roughly the lows from March 2020, as well as the 2016 election breakout level.
Here’s the bottom line: It wouldn’t be terrible to see a pullback from current levels - particularly if the S&P 500 can find support near 2,400 and avoid making new lows.
That puts a higher-low setup in play and gives the bulls another chance to reassess the situation.