Goodbye, summer bounce.
The S&P 500 ended Friday below a key chart support level that has served as a battleground in recent years, prompting technical analysts to warn of a potential test of the stock market’s June lows.
“During the last three years, the level of [S&P 500] with the highest traded volume has been 3,900. It closed below that on Friday for the first time since July 18, which, in our view, opens the door down to the June lows” near 3640, Jonathan Krinsky, chief market officer at BTIG, said in a Sunday note (see chart below) .
S&P 500 SPX,
ended Friday at 3,873.33 – down 0.7% on the session and 4.8% for the week for its lowest close since July 18. This led to the index rising 5.7% from the closing bottom on 16 June of 3,666.77. The S&P 500 logged an intraday selling low of 3,636.87 on June 17, according to FactSet.
Dow Jones Industrial Average DJIA,
fell 4.1% last week to end Friday at 30,822.42, while the Nasdaq Composite COMP,
saw a 5.5% weekly drop to 11,448.40. Stock index futures ES00,
traded flat until a little late on Sunday.
A move back to June lows likely won’t be a straight line, Krinsky wrote, but the lack so far of noticeable “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 the 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 panic levels often seen near market bottoms above 40.
Stocks had rebounded sharply from June lows, which had sent the S&P 500 down 23.6% from its Jan. 3 record of 4,796.56. Krinsky and other chart watchers had noted that in August the S&P 500 completed a retracement of more than 50% of its fall from its January high to its June low—a move that had not previously been followed by a new low.
However, Krinsky at the time had warned against chasing the bounce, writing on August 11 that “the tactical risk/reward looks bad for 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 support test at 3,835, “where the next big gap to fill in the market lies.”
Shares fell sharply last week after a Tuesday reading of the consumer price index for August showed that inflation was hotter than expected. The data cemented expectations for the Federal Reserve to deliver another supersize 75 basis point, or 0.75 percentage point, increase in the fed funds rate, with some traders and analysts pricing in a 100 basis point increase as policymakers conduct a two-day meeting on Wednesday.
Preview: The Fed is ready to tell us how much “pain” the economy will suffer. It will not, however, indicate a recession.
The market’s pullback from June lows came as some investors had become more confident in a Goldilocks scenario in which the Fed’s policy tightening would wring out inflation in a relatively short period of time. For bulls, the hope was that the Fed would be able to “tilt” away from rate hikes, averting a recession.
Difficult inflation readings have allowed investors to raise expectations of where they think interest rates will peak, raising fears of a recession or sharp decline. Aggressive tightening by other major central banks has created fears of a broad global downturn.
See: Can the Fed Tame Inflation Without Crashing the Stock Market? What investors need to know.
Hear from Ray Dalio at the Best New Ideas in Money festival on September 21st and 22nd in New York. The hedge fund pioneer has strong views on where the economy is headed.