Goodbye, summer bounce.
The S&P 500 ended Friday below a crucial chart support level that has served as a battleground in recent years, prompting technical analysts to warn of a possible test of June’s stock market lows.
“During the last three years, the level in the [S&P 500] with the highest amount of traded volume has been 3,900. It closed below that on Friday for the first time since July 18, which, in our opinion, opens the door for June lows near 3640, said Jonathan Krinsky, chief market technician at BTIG, in a note on the Sunday (see chart below). .
BTIG
The S&P 500
SPX
ended friday at 3,873.33, down 0.7% on the session and 4.8% on the week for its lowest close since July 18. That left the index down 5.7% from its June 16 closing low of 3,666.77. The S&P 500 posted an intraday low for the sell-off at 3,636.87 on June 17, according to FactSet.
The Dow Jones Industrial Average
DJIA
fell 4.1% last week to close Friday at 30,822.42, while the Nasdaq Composite
compensation
saw a weekly drop of 5.5% to 11,448.40. Stock Index Futures
ES00
They were trading flat a little late on Sunday.
A move back to the June lows is likely not a straight line, Krinsky wrote, but rather the lack so far of any discernible “panic” in the Cboe volatility index.
vix
The futures curve and the lack of a drop to more extreme oversold conditions, as measured by the monthly relative strength index, do not bode well, he said.
Other analysts have noted the lack of a sharper rise in spot VIX, often referred to as Wall Street’s “fear gauge.” The options-based VIX ended Friday at 26.30 after trading as high as 28.42, above its long-term average near 20 but well below the panic levels often seen near market bottoms for above 40.
Stocks had rebounded sharply from June lows, which had sent the S&P 500 down 23.6% since January 1. 3 final record at 4,796.56. Krinsky and other chart watchers had looked at the S&P 500 in August completed a retracement of more than 50% of its decline from the January high to the June low, a move that in the past had not been followed by a new low.
Krinsky at the time had, however, warned against chasing the rebound, writing on August 1. 11 that “tactical risk/reward looks poor to us here”.
Michael Kramer, founder of Mott Capital Management, had warned in a note last week that a close below 3,900 would set up a test of support at 3,835, “where the next big gap to fill in the market lies.”
Stocks fell sharply last week after a Tuesday reading in the consumer price index for August showed inflation. Running hotter than expected. The data cemented expectations that the Federal Reserve will deliver another big hike of 75 basis points, or 0.75 percentage point, in the fed funds rate, with some traders and analysts pointing to in hike of 100 basis points when policymakers completed a two-day meeting on Wednesday.
The market’s rebound from its June lows came as some investors had become more confident in a Goldilocks scenario in which Fed policy tightening would wipe out inflation in a relatively short time. For bulls, the hope was that the Fed could “walk away” from rate hikes, averting a recession.
Stubborn inflation readings have prompted investors to raise expectations about where they think rates will peak, raising fears of a recession or sharp slowdown. Aggressive tightening by other major central banks has fueled fears of a widespread global slowdown.
Watch: Can the Fed tame inflation without crushing the stock market? What investors need to know.
Hear Ray Dalio at the Festival of the best new ideas on the money on Sept. 21 and Sept. 22 in New York. The hedge fund pioneer has strong views on where the economy is headed.
