After declining for seven weeks the S&P 500 Index finally made an overdue bounce, at least from the perspective of the nervous bulls.

S&P 500 Index (SPX) 4158.24 romped higher adding 256.88 points or +6.58% last week with most of the advance occurring on Thursday and then again on Friday as it cleared resistance from the May 17 pivot high at 4090.72 increasing the odds it will soon reach the 50-day Moving Average up at 4276.73.

As noted last week, after making a new intraday low on Friday, May 20, at 3810.32, it made a remarkable reversal late in the day to close slightly higher. Next Monday, May 23, confirmed the reversal then subsequently side-tracked the next day after a disappointing report from a widely followed social media stock heavily reliant on digital advertising.  Back in the groove on Wednesday, it made higher highs and higher lows both Thursday and Friday on moderate volume.

(Click on image to enlarge)

Source: IVolLive

Digging down into the weeds looking for a reason other than just due for an oversold bounce revealed:

The interest rate of the 10-Year U.S. Treasury Note declined 4 basis points to end the week at 2.78%. Bond traders begin buying the long end when they anticipate a recession, confirmed by the U.S. Dollar Index (DX) 101.70 declining from 105.07 on May 13. With the economy showing some signs of slowing, the previous unlimited rate hike narrative began wearing thin.

On Wednesday iShares iBoxx High Yield Corporate Bond ETF (HYG) 80.19 gained 3.73 points or +4.88% last week and 1.17 points or 1.52% on Tuesday as the yield declined to 4.51% from 4.58%, confirming the less rate pressure scenario, further supporting the bounce. While some attributed declining rates to the release of the FOMC minutes that seemed to dismiss the chance for rate hikes beyond those already announced astute observers might have noticed HYG made a reversal on Thursday, May 19, after reaching a low of 75.87, one day before the SPX reversed the next day.

Further confirmation comes from improving Market Breadth. See below.

Since every picture helps to tell a story, here's the view from the SPX options market. For the week, implied volatility measured by IVX declined 3.71 points or -12.61% to end at 25.72% reflecting the sudden sentiment change compared to 26.22% on May 20.

(Click on image to enlarge)

Source: IVolLive

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications gained 273.68 points to end at -573.16 with 105.91 of the 273.68 points added on Friday. Improving breadth greatly increases the probability that the S&P 500 Index will reach the 50-day Moving Average up at 4276.73 – perhaps as early as this week.