The S&P 500 has broken through key support at its 100-day and 20-week moving average for the first time in about a year, increasing the probability of a full correction in the index in coming weeks. There have been just 8 other instances when the market has broken down as much through the key level after a bullish advance in the last ten years. The market carried on to deeper lows in 6 of the 8 instances. The range of declines from pre-breakdown peak to ultimate low was 0% (in 2016/late 2020) to 22.5% (in 2022). On average, the declines lasted 19 weeks from pre-breakdown peak to ultimate trough, though the range is wide. The market managed to shrug off the break of the 20-week moving average in 2016 and late 2020.
A resolution of war with Iran and/or cooldown in the price surge for oil is the primary, but not the only indicator to watch for stocks. VIX has spiked but is not yet at 40 – the level that normally suggests a sentiment low is likely to emerge. Momentum (14-day RSI) may also need to drop to near 30 to suggest a low is near. Valuations are still above levels supported by macro data and will likely need to fall closer to our model’s indication of 19X before a buying opportunity emerges. Policy shifts also often create sentiment shifts. The FOMC is scheduled to meet again next week. Higher oil prices complicate matters, but if the Fed telegraphs greater chances of an ease coming due to jobs weakness, it could also help stocks find their footing.
Disclosure: HB Wealth is an SEC-registered investment adviser. The information reflects the author’s views, opinions, and analyses as the publication date. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This information contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning the belief and opinions in respect to the future. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. The information does not represent legal, tax, accounting, or investment advice; recipients should consult their respective advisors regarding such matters. Certain information herein is based on third-party sources believed to be reliable, but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.
