Both investors and traders were likely a bit apprehensive at the start of last week as the 5.5% decline in the Nasdaq Composite Index was the largest since November 2022. The 10% decline in the high-profile NVIDIA
NVIDIA

SPDR Dow Jones Industrial Average ETF Trust
Corp. (NVDA) on Friday, April 19^th further worried the stock market bulls while reinforcing the growing bearish commentary.

From my technical perspective corrections in a bull market or rallies in a bear market serve to shift the market sentiment enough to create the environment so that the prior market trend can resume.That is what I have been expecting since the April 4^th key reversal which started the correction in the S&P 500.

These changes in sentiment can be measured in several ways. In mid-April, S&P Global commented that “US equity investors’ risk appetite declined from 14% in March to 5% in April and that was a three-month low. I feel confident that a more recent risk rating as of the close on April 19^th would have been even lower at the start of the week.

The sentiment data from the American Association of Individual Investors (AAII) goes back to 1987 and has been a part of my analytical routine for many years. In last week’s comments, I tried to argue that declining bullish sentiment would help fuel the next market rally.

The recent high in the bullish % at 51.7% occurred on March 6^th with a secondary high on March 27^th of 50%. As of April 17^th, the bullish was down to 38.3%, and then last week moved even lower to 32.1%. At the October 2023 lows, the bullish % sentiment was 24.3%. Every Thursday morning you can find the most recent survey results on the AAII site.

The weekly chart of the Spyder Trust (SPY
Principal Shareholder Yield Index ETF

SPDR S&P 500 ETF Trust
) also suggested a week ago that it could be near a low as it closed on April 19^th at $495.18 just above the 20-week EMA at $494.48. It had also come much closer to the weekly starc- band at $493.49. The early 2022 high at $480.50 is still an important level of support.

After this week’s action, the S&P 500 Advance/Decline has moved back above EMA reversing the prior week’s negative signal. It has been leading the SPY higher since June 2023 when it projected a new high in the S&P 500 that was not attained until early in 2024. The NYSE Stocks Only A/D line tracks a different group of financial instruments and also reversed back above its EMA this week.

The SPY close last week at $508.60 was just below the yearly R1 at $509.60. A higher close next week with positive advance/decline numbers will indicate a move in the SPY to the recent high at $524.61 if not the yearly R2 at $545.36.

Many growth stocks peaked in early February 2024. One of my favorite tools to analyze the relationship between growth and value stocks is to look at the ratio of the iShares Russell 1000 Growth (IWF
iShares Russell 1000 Growth ETF

IWF
). When the ratio is rising as it was for most of 2023 it means that growth stocks or ETFs were leading value.

In the rally from the early 2024 low, growth stocks were leading but that changed in February as value stocks started to lead. That also changed last week as the IWF was up 3.7% versus just a 1.47% gain for the IWD
iShares Russell 1000 Value ETF
.

The weekly chart of the IWF/IWD ratio was therefore sharply higher last week but is still in a downtrend (i.e lower highs and lower lows). The MACD and MACD-His both turned negative in March and are still making lower lows. This favors value over growth.

Many investors and traders may not be aware of the importance of the growth/value analysis in the past twenty years of stock market history. The dot.com stock market peak in March 2000 was identified by the ratio as a peak in the growth stocks as value stocks started to lead.

As the stock market peaked in October 2007, growth stocks were already starting to lead value stocks and this continued during the bear market of 2007-2008. Therefore value stocks declined more than growth stocks. This was also confirmed by the relative performance (RS) of the financial stocks and technology ETFs.

The monthly chart shows what may be a triple top as the ratio as it peaked ahead of the COVID market decline and then in late 2021 when most of the largest growth stocks peaked ahead of the 2022 decline. The ratio is trying to turn higher in April but is still well below an upside breakout. A drop below the 20-month EMA would support the view that growth stocks may be completing a major top. My daily technical studies

The daily chart of the Invesco QQQ
Invesco QQQ Trust
Trust (QQQ) shows that it was able to close just barely above the 20-day EMA at $430.93. The preliminary monthly pivot for May is at $430.53 which will be an important level to watch this week. The former support, line a, is now resistant in the $437.91 area.

The Nasdaq 100 Advance/Decline line closed the week just above its WMA which is trying to flatten out. The A/D line needs to move strongly above the downtrend, line b, to indicate that the correction is over. That will require a day or two of strong A/D numbers early in the week. The RS closed the week above its still declining WMA and it needs to move above the downtrend, line c, to indicate that QQQ is again leading the SPY.

The stock market dropped sharply early Thursday on the weaker-than-expected GDP report but the selling was well absorbed as the market moved higher throughout the day. The action earlier in the week did shift the outlook to positive heading into Friday’s PCE report which justified new buying. It will take confirmed signals from A/D lines to indicate that the risk of heavier buying is now warranted.

A positive close this week should convince many of those looking for a more severe market decline to modify their outlook. If that is the case it may take several weeks for the bullish % to rise significantly. A day of sharply negative A/D numbers early in the week will suggest at least a test of the recent lows.

For more on AAII Sentiment Analysis