Traders Brace for S&P 500 Free Fall as Chart Supports Crumble

Traders Brace for S&P 500 Free Fall as Chart Supports Crumble

(Bloomberg) — Spillover from proposed U.K. tax cuts is flowing into the U.S. stock market.

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The S&P 500 fell as much as 1.9% on Friday, bringing its decline for the week to 4.5%. The index has already closed below the closely watched 3,800 level this week, leaving the June market low of 3,666 as the next support line on the technical charts.

The UK government unveiled a sweeping tax cut plan that sent the pound and the nation’s bonds crashing as investors worried about stimulus effects with inflation running high. This has led to an already sour mood for risk assets around the world. The S&P 500 plunged 1.7% at 10:09 a.m. in New York and traders watching the charts for signs of where the decline might end are bracing for the worst.

“The technicals have fallen out of bed,” Art Hogan, chief market strategist at B. Riley, said in a telephone call. “The loss of 3,800 now brings June lows, so people are waiting for that to happen.”

The S&P 500 fell for a fourth straight day and is on track for its fourth weekly decline in five. The selloff was relentless across the board: the index had more than 400 members close lower in each of the last three days before Friday.

Its collapse from August highs solidifies the downtrend channel since the bull market peaked in early January, according to Gina Martin Adams at Bloomberg Intelligence. “The break below the 3,900 support leaves little room for the index to test the June lows,” he wrote in a note.

The Federal Reserve this week made clear it will continue to raise interest rates sharply until officials see signs that price pressures are easing. This process will not be “painless” for the labor and housing markets, Fed Chairman Jerome Powell warned.

Wednesday’s rate hike came on forecasts that the central bank has a further tightening of 1.25 percentage points in store for investors this year, a much more aggressive pace than investors had expected.

Despite the disaster, stocks are still far from obvious bargains. At June’s low, the S&P 500 was trading at 18 times earnings, a multiple that beat the low valuations seen in all of the previous 11 falling cycles, according to data compiled by Bloomberg. In other words, if stocks recover from here, this bear market bottom would be the most expensive since the 1950s.

While investors were positioned as if the economy was headed for a soft landing, that is no longer the case, according to Anastasia Amoroso, chief investment strategist at iCapital.

“What markets really need to do is price in a recession because it looks like that would ultimately cost a weakness in the labor market,” he told Bloomberg TV this week.

The market has been trading in a range of 3,700-3,800 to 4,300 for some time now, he said.

“We may need to see a break below the bottom of that trading range to find really cheap value in stocks,” Amoroso said. “We’re just not there yet, so the trade for now is to be really defensive and get paid while you wait for that bottom in the market.”

As for the June low, many see an ominous signal in the number.

“Anything lower than where it is now feels diabolical,” Kim Forrest, founder and chief investment officer of Bokeh Capital Partners, said in an interview.

(Updates prices everywhere.)

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