Why stock market bears are heading into June after S&P 500 falls back below 3,900

Why stock market bears are heading into June after S&P 500 falls back below 3,900

Goodbye, summer bounce.

The S&P 500 ended Friday below a key chart support level that has been a battleground in recent years, prompting technical analysts to warn of a potential test of the stock market’s June lows.

“For the last three years, the level has been on the [S&P 500] and 3,900 is the most traded amount. It closed below that on Friday for the first time since July 18 which we believe opens the door down to the June lows” near 3,640, Jonathan Krinsky, chief market technician at BTIG, said in a Sunday note (see the chart below).

BTIG

The S&P 500 SPX,
-0.72%
ended Friday at 3,873.33 – down 0.7% on the session and 4.8% for the week for the lowest close since July 18. That left the index up 5.7% from its last June 16 low of 3,666.77. The S&P 500 registered an intraday low for the sale at 3,636.87 on June 17, according to FactSet.

Dow Jones Industrial Average DJIA,
-0.45%
Last week fell 4.1% to end Friday at 30,822.42, while the Nasdaq Composite COMP,
-0.90%
was down 5.5% weekly to 11,448.40. Stock index futures were trading flat to slightly higher on Sunday afternoon.

The move back to June lows likely won’t be a straight line, Krinsky wrote, but the lack of discernible “panic” so far in the Cboe VIX Volatility Index,
+0.11%
The futures curve differs from the lack of a fall to more extreme oversold conditions as measured by the monthly relative strength index, he said.

Other analysts noted the lack of a sharper rise in the spot VIX, often called 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 above 40.

Stocks bounced back sharply from June lows, which saw the S&P 500 down 23.6% since January 3 to end at 4,796.56. Krinsky and other chart watchers noted that in August the S&P 500 completed a decline of more than 50% from its fall from the January high to the June low – a move not seen in the past after new lows to follow.

Krinsky had warned at the time, however, not to chase the bounce, writing on August 11 that the tactical risk/reward looks good for us here.

Michael Kramer, founder of Mott Capital Management, 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 is going to be filled in the market.”

Stocks fell sharply last week after Tuesday’s reading of the August consumer price index showed that inflation was running hotter than expected. The data reinforced expectations for the Federal Reserve to deliver another 75-basis-point, or 0.75-percentage-point, hike in the fed funds rate, with some traders and analysts penciling in a 100-basis-point hike when policymakers. two-day meeting to conclude on Wednesday.

Preview: The Fed is ready to tell us how much ‘pain’ the economy will have. It will not yet hint at the recession though.

The market bounced off its June lows as some investors had more faith in a Goldilocks scenario in which the Fed’s policy tightening would end inflation in relatively short order. For bulls, the expectation was that the Fed would be able to “slow down” rate hikes, thereby averting a recession.

Inflated inflation readings have investors trying to raise their expectations of where they think rates will peak, heightening fears of a recession or sharp slowdown. Aggressive tightening by other major central banks raised fears of a broad global slowdown.

Look: Can the Fed moderate inflation without crushing the stock market? What investors need to know.

Hear Ray Dalio at the Best New Ideas for Money Festival on September 21st and 22nd in New York. The hedge fund pioneer has strong views on the economy’s leading edge.

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