What's Next For The Most Hated V-Shaped Rally?

The S&P 500 and Nasdaq 100 recently reached new highs, yet the market's reaction remains mixed, reflecting persistent bearish sentiment despite a strong V-shaped rally from April lows. However, underlying technical strength is evident as both the S&P 500 and Nasdaq 100 Advance/Decline lines achieved new highs, signaling a positive third-quarter outlook, further bolstered by a rare second Zwieg Breadth Thrust signal this year. While the AAII Bull%-Bear% indicator previously indicated extreme bearishness, a recent rebound in bullish sentiment in early May is considered a key turning point. Despite these bullish signals, the lingering high bearish sentiment suggests a potential deeper pullback before July's end, advising investors to monitor key technical levels for dip opportunities.

Analysis

Despite the S&P 500 and Nasdaq 100 achieving new all-time highs, market reaction is muted, reflecting persistent bearish sentiment that has characterized the V-shaped rally from the April lows. This skepticism is quantified by the American Association of Individual Investors (AAII) survey, which saw bearish sentiment exceed bullish sentiment by as much as 40 percentage points in late February, a level of pessimism not seen since the 2009 market bottom. However, powerful underlying technicals contradict this sentiment. Both the S&P 500 and Nasdaq 100 Advance/Decline lines have confirmed the rally by making new highs, a historically bullish signal. Furthermore, the market generated a second Zwieg Breadth Thrust signal this year, an exceptionally rare event last seen in 1962 that, in 100% of past instances since 1945, preceded an average 12-month gain of 23.3%. The Invesco QQQ Trust has demonstrated clear market leadership over the SPY, up 6.4% in June, a trend confirmed by its relative strength indicator. While the confluence of strong breadth and momentum indicators suggests a positive outlook for the third quarter, the enduring high level of bearishness indicates a potential for a deeper, albeit likely temporary, pullback before the end of July.

Key Decisions for Investors

• Given the strength in the S&P 500 and Nasdaq 100 Advance/Decline lines and the historically powerful Zwieg Breadth Thrust signal, investors should maintain a structurally bullish outlook for the medium term.
• Consider utilizing any near-term pullbacks, which the analysis suggests are likely before the end of July due to lingering bearish sentiment, as strategic buying opportunities rather than signals of a trend reversal.
• Monitor key technical levels such as monthly pivots and 20-day EMAs for tactical entry points, while continuing to favor market leadership in the Nasdaq 100 (QQQ) as long as its relative strength remains positive against the S&P 500 (SPY).
• Pay close attention to investor sentiment indicators like the AAII survey, as the current high level of bearishness could serve as a contrarian catalyst for further market upside if technical strength persists.