Has the US Stock Market Turned a Corner? Key Indicators to Watch for the Next Move

The U.S. stock market is showing early signs of recovery, with some positive shifts observed in recent weeks. However, according to Goldman Sachs’ chief U.S. trader, John Flood, there are still a few hurdles that must be crossed before the rally can be confirmed. While there has been a notable reduction in foreign selling pressure on tech stocks, a rebound from hedge funds, and stable retail buying, the market’s upward trajectory is not yet guaranteed. Three critical indicators need to improve to confirm a more sustained bullish trend.

Positive Signals Emerge Amid Market Volatility

Last week, the market witnessed a sharp rebound, signaling potential for continued growth. $SPX plummeted to its lowest point of the year in early April, dropping to 4835, but it swiftly recovered, climbing by 735 points to close at 5525 just a few days later.

Flood pointed out that one of the most promising developments was the reduction in selling pressure from international investors, especially in major tech stocks like $INTC and $GOOG . This shift, combined with an uptick in demand from institutional investors, suggests that large technology stocks, which had been under heavy pressure, may now be stabilizing.

Furthermore, a notable rebound from hedge funds added another layer of optimism. On April 5, Goldman Sachs observed one of its highest net buying days in the past year. The bulk of this activity—68%—was driven by the short-covering of macroeconomic products, while the remaining 32% came from individual stock purchases. Such behavior, Flood notes, is typically a constructive sign of market sentiment shifting in favor of growth.

Are Retail Investors Still Supporting the Market?

Another encouraging sign for the U.S. stock market is the persistence of retail investor demand. Despite macroeconomic uncertainty, retail investors have shown no signs of pulling back, particularly as long as unemployment remains low. In fact, with no significant disruptions in the labor market, retail investors are likely to keep their purchasing momentum, which could be key in sustaining the market’s upward trend.

Moreover, company earnings have surpassed pessimistic forecasts, adding further fuel to the optimistic outlook. While only 30% of companies have reported earnings so far, 46% of them exceeded expectations by more than one standard deviation, which is better than the historical average of 48%. Only 10% reported earnings below expectations, also lower than the historical norm of 14%. Google, in particular, reported solid results, which helped to prevent another round of selling in major tech stocks.

A Strong Corporate Buyback Window Opens

Another factor to watch is the corporate buyback window, which typically opens around April to May. According to Goldman Sachs, this period historically provides strong support for the market, accounting for about 20% of annual buybacks. The firm estimates that corporations are authorized to repurchase $1.45 trillion worth of stock, and they expect $1.16 trillion in buybacks to be executed during the period. This will likely provide substantial backing for the market as earnings season progresses.

Additionally, the upcoming pension fund rebalancing at the end of April is expected to contribute about $15 billion in stock buying, further bolstering market sentiment. With Commodity Trading Advisors (CTAs) also showing bullish signals, these factors suggest that the market has strong institutional support in place.

Key Obstacles to Overcome

Despite the positive signs, Flood remains cautious. The market is not yet out of the woods, and there are three key indicators he is watching closely to determine whether the rally can continue:

1. Market Breadth: Right now, the rally is not broad enough. While there has been some strength in the large-cap tech stocks, a truly healthy market rally requires more widespread participation across various sectors and stocks. At the moment, the breadth of the rally remains well below historical averages, which raises concerns about its sustainability.

2. Liquidity: The liquidity in the market is still relatively shallow. For example, the depth of the best bid and ask in the S&P 500 e-mini futures contract is currently around $4 million, well below the historical average of $13 million. Shallow liquidity makes the market more susceptible to sharp price swings, and traders should be prepared for continued volatility until liquidity conditions improve.

3. ETF Trading Volume: Exchange-Traded Funds (ETFs) have been playing a significant role in market activity, with ETF trading volume reaching as high as 44% of total market volume on April 9. Currently, it stands at around 35%. Flood believes that this proportion needs to fall below 30% to indicate that hedging activity is waning and risk appetite is returning. Until this happens, the market may remain vulnerable to unpredictable movements.

A Market on the Edge

The past week’s positive signals are encouraging, but they are not definitive enough to call a clear market rebound. While there are signs of strengthening institutional demand, stable retail investor support, and solid earnings, the market still faces critical hurdles, including a lack of broad participation, shallow liquidity, and high ETF trading volumes.

For traders looking to take advantage of a potential rally, caution remains the watchword. As Flood suggests, the market may have reached a turning point, but confirmation will depend on how these three key indicators evolve in the coming weeks. Until then, the market’s future direction remains uncertain, and careful monitoring is essential.

The coming days and weeks will likely offer more clues. Investors should remain vigilant and look for signs that the market’s broader recovery is gaining momentum.

This content is provided for informational or educational purposes only and does not constitute investment advice.