June stock market lows return after S&P 500 misses 3,900

June stock market lows return after S&P 500 misses 3,900

Stock market bears maintained the upper hand last week, with the S&P 500 ending Friday below a critical chart support level that has technical analysts warning of a possible test of the June lows.

“Over the past three years, the level at [S&P 500] with the highest trading volume was 3,900. It closed below that on Friday for the first time since July 18 which, in our view, opens the door to June lows” near 3,640, Jonathan Krinsky, chief market technician at BTIG, said in a Sunday note (see chart below). .

BTIG

The S&P 500 SPX,
-0.72%
closed Friday at 3,873.33 — down 0.7% on the session and 4.8% for the week for its lowest close since July 18. That sent the index up 5.7% from its June 16 closing low of 3,666.77. The S&P 500 hit an intraday selloff low of 3,636.87 on June 17, according to FactSet.

The Dow Jones Industrial Average DJIA,
-0.45%
fell 4.1% last week to close Friday at 30,822.42, while the Nasdaq Composite COMP,
-0.90%
posted a weekly decline of 5.5% to 11,448.40 points.

A return to the June lows likely won’t be a straight line, Krinsky wrote, but the lack of distinct “panic” so far in the Cboe Volatility Index VIX,
+0.11%
The futures curve and the lack of a decline in 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 lows above 40.

Stocks had rebounded sharply from June lows, when the S&P 500 fell 23.6% from its Jan. 3 record high of 4,796.56. Krinsky and other chart watchers had noted that the S&P 500 in August completed a reversal of more than 50% of its decline from the January high to the June low — a move that had not previously been followed by a new low.

Krinsky at the time cautioned against chasing the bounce, however, writing on August 11 that “our tactical risk/reward looks poor 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 to fill in the market is.”

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

Preview: The Fed is ready to tell us how much “pain” the economy will suffer. However, it will not indicate a recession.

The market’s recovery from June lows came as some investors had grown more confident in a Goldilocks scenario in which the Fed’s policy tightening would turn around inflation in a relatively short period of time. For the bulls, the hope was that the Fed could “walk away” from rate hikes, preventing a recession.

The persistent inflation readings have left investors raising expectations of where they think interest rates will go, fueling fears of a recession or sharp slowdown. Aggressive tightening by other major central banks has fueled fears of a broad global slowdown.

I see: Can the Fed tame inflation without crushing the stock market? What investors should know.

Hear 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.

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