Several short-term market indicators are flashing a buy signal. Last week, the S&P 500 danced violently around key support levels as volatility and sentiment readings flashed extreme pessimism signals.

Historically, this combination can be a catalyst for a tradable market bottom. But other than pricing in some degree of a slowing economy, the U.S. markets remain very expensive relative to history and several headwinds remain.

The most recent Beige Book report (the economic report that the Federal Open Market Committee uses as a major discussion point for the upcoming March 19 policy meeting) used the word uncertainty at double the rate of the past five years.

Clearly, tariff uncertainty is having a significant impact on business investment decisions. The Atlanta Fed’s “GDP NOW” model is forecasting the risk of a negative gross domestic product (GDP) in the first quarter, even when adjusting for the anomaly of gold moving from Europe to the U.S., which is picked up in the trade deficit, but does not factor into GDP.

The American Association of Individual Investors (AAII) reports a weekly survey of sentiment. They simply ask investors if they are bullish, bearish, or neutral for the next six months (join and take the survey here).

The degree of bearish sentiment relative to bullish sentiment has moved to levels typically seen near a market bottom. We do not know if it’s a market bottom or the market bottom, but it does suggest investors have likely sold and built up cash positions looking for an opportunity to buy in again.

Another extreme reading seen last week was in the behaviour of volatility. Typically, when near term volatility (front month futures) increases relative to longer term volatility (fourth month futures), investors are currently in panic mode.

The lower chart measures the spread in volatility in standard deviations. Once every few years we have an extreme event.

This was last seen in August when the markets were worried about Japanese interest rates and currencies forcing massive hedge fund deleveraging. It lasted a few days until Japan reversed tact.

We are hearing that the big hedge funds that are levered up are deleveraging. The bottom line is, more selling and more volatility ahead will likely limit the ability of the market to bounce. Surprise (either way) JOLTS or inflation data this week can throw more fuel on the volatility fire.

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