US stocks continue to show a downside bias as the S&P 500 Index retests the lows of 2022. Headwinds continue to blow from a familiar mix of threats: blowback from the Ukraine war, elevated inflation, rising interest rates, and slowing economic growth. All these risk factors appear set to continue for the near term, which implies that the market will remain on the defense in the foreseeable future.

The S&P 500’s price trend certainly looks weak vs. recent history. The index is currently trading at/near its downside support – roughly 4184, as of yesterday’s close (Apr. 27). Breaching this level on the downside would trigger a stronger forecast for technical weakness for the near-term outlook.

How much pessimism currently weighs on the market? One way to estimate an answer is by monitoring an aggregate of several proxies via CapitalSpectator.com’s S&P 500 Sentiment Momentum Index (for details, see this summary). The index (cited in Z-scores) is currently posting its lowest reading since the pandemic initial triggered a sharp correction in the spring of 2020, leaving the index below -1 standard deviation for a second time this year. Values below -1 are rare, suggesting that the market’s sentiment is again testing a support level that, if it persists or gives way to lower readings, could be interpreted as signaling the start of a bear-market regime.

Similarly, the S&P 500’s current drawdown – deeper than -10% — is another sign that the current correction is no longer garden-variety noise.

Using a Hidden Markov model (HMM) estimates a roughly 20% probability that a bear market has started. The question is whether this indicator rises above 50% in the days and weeks ahead, which would be a high-confidence warning. (For some background on how the analytics are calculated in the chart below, see this primer.) 

Applying another econometric model to estimate bubble risk shows that the high-risk warning from a year ago has since pulled back to relatively moderate levels lately. (See this 2014 post for some background on the methodology).

For a longer-term perspective on the outlook for US equities, Professor Robert Shiller’s Excess CAPE Yield implies that expected return will be sharply lower for the decade ahead vs. recent history.

Finally, the ratio for a pair of US equity ETFs continues to suggest that the recent risk-on appetite for stocks peaked late last year and continues to fade. Comparing the relative performance of the S&P SPDR (SPY) to iShares MSCI Minimum Volatility (USMV) indicates that market sentiment remains defensive (the ratio is falling).