The S&P 500 Is Going To Move Much, Much Lower

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The S&P 500 Is Going To Move Much, Much Lower

The S&P 500 Is On The Brink Of Major Collapse

The S&P 500 is going to move much, much lower. The broad market index has been pushed to it’s breaking point and frankly, I think the cracks are already showing. The underlying fundamental conditions remain positive, it’s not like we’re in a recession, but the fear of recession is real and it is festering. The biggest news in terms of recession and what may happen and when is the yield-curve. The U.S. yield-curve went into full-inversion early this week and signals recession will come within 18 months. The caveat though is this, the data and some experts think it is a false signal. This week’s round of economic data wasn’t strong, it wasn’t robust, but it was positive, in some cases accelerated, and labor markets remain tight, the consumer healthy.

The daily chart of the S&P 500 is painting a mixed-picture. In some ways the index looks like it could throw off a pretty strong buy signal but I think that is just hope lingering. The MACD is bearish but shows a double peak where the second is lower and consistent with support at current levels. Current levels appear to be supportive because the price action is forming a potential Double Bottom Reversal. The risk is that price action is still low within the potential reversal pattern, resistance is likely strong at the short-term EMA, and stochastic does not even come close to confirming. Stochastic is still pointing lower which means the overall trend is still down and, since momentum is still bearish, I think we’re going to see prices move lower rather than higher in the near term.

The weekly chart of the S&P 500 is more bearish. In fact, it is just plain bearish. Both MACD and stochastic have formed bearish crossovers in tandem with the index peak. The index has moved below the previous all-time which is a very important support/resistance pivot point. Since the fall, the index has retested and confirmed resistance at this level where I think resistance will remain. The long-term 150 day EMA is providing some support but it is tenuous. A move below the 150-day moving average would be very significant, such a move could lead the S&P 500 down to the 2,700 or 2,600 level.

The key will be what happens on Monday. Monday is when the Weekend Warriors do a lot of their trading. They’ve had the weekend to think about what’s happened, all the gurus (myself included) will have put out their analysis, and the urge to sell may be strong. Maybe not, we’ll see. If prices rally on Monday, for whatever reason, I won’t be bullish until I see the index get back above 2,940.

How Much Farther Will the S&P 500 Drop? Much Lower, Goldman Sachs Says.

A screen shows a graph before the opening bell at the New York Stock Exchange (NYSE) on March 16, 2020 at Wall Street in New York City.

The S&P 500 index on Monday had its worst trading day since 1987, down 12% from Friday’s close. The market benchmark, which closed at 3386.15 less than a month ago on Feb. 19, ended the session down to just 2386.13.

A team of strategists at Goldman Sachs thinks the index will end the year at 3200—but they see a bottom at 2000 along the way.

“The coronavirus has created unprecedented financial and societal disruption,” Goldman Sachs strategist David Kostin and colleagues wrote in a note Friday. “We have cut our EPS [earnings-per-share] forecast twice in two weeks. Every investor asks ‘What is the floor for stocks?’”

That’s tough to say, given how volatile the market has been, they say. Counting Monday, the Dow Jones Industrial Average saw its third-straight move of 9% or more—something that hasn’t happened since October 1929. But based on their estimates that take into account the Federal Reserve model, a Dividend Discount Model, and history, their model predicts a mid-year trough of 2000 for the S&P 500 index.

On a more positive note, the Goldman Sachs team points out event-driven bear markets often bring out sharp rebounds. The strategists expect the S&P 500 index to end the year at 3200—a hair lower than where it was at the end of 2020.

“The lesson of prior event-driven bear markets is that financial devastation ultimately allows a new bull market to be born,” they wrote. “Consider the one-month decline of 19% sparked by the 1998 Russian sovereign debt default that was followed by a 28% rally during the subsequent six months. Or the 19% drop in 2020 during the Eurozone debt crisis that was followed by a 29% rebound in six months.”

The Tell

William Watts

RBC sees room for S&P 500 to fall up to 20% from peak

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The U.S. stock market’s tumble into correction territory this week indicates the global spread of the COVID-19 epidemic has triggered a full-fledged “growth scare,” according to analysts at RBC Capital Markets.

Analysts, led by Lori Calvasina, RBC’s head of U.S. equity strategy, argued in a Thursday note that a drop of 5% to 10% amounted to a “garden-variety pullback,” and that if that threshold didn’t hold, “the market will be telling us that a growth scare is under way.”

Stocks on Thursday subsequently ended the day in correction mode — a drop of more than 10% but less than 20% from a recent high. The S&P 500 index SPX, +2.67% dropped from a record close into the correction in just six days, the fastest such drop on record, as investors feared global supply chain shocks could slow economic growth.

Major stock indexes trimmed losses Friday, but logged their largest weekly declines since the depths of the financial crisis in October 2008. The Dow Jones Industrial Average DJIA, +3.10% saw a 12.4% weekly decline, while the S&P 500 shed 11.5%. The move left the Dow 14% below its all-time closing high from Feb. 12, while the S&P 500 was down 12.8% from its record close.

An economic growth scare would raise the risk of a 14% to 20% decline for the S&P 500, in line with pullbacks seen in 2020, 2020, 2020-16 and 2020, which could take the S&P 500 to the 2,700-2,900 range, the analysts wrote (see table below).

On the corporate earnings front, the analysts said their stress test sees the coronavirus outbreak knocking $4 off their official 2020 S&P 500 earnings-per-share forecast to $170, as well as offering $5 of downside risk from the current bottom-up consensus forecast of $175 a share. If $170 is “in the right neighborhood,” a valuation case would start to emerge for the S&P 500 to trade below 2,900, they said.

And if the outlook moves beyond growth scare to looming recession — something the analysts emphasized they were not forecasting — the S&P 500 would be expected to retreat 24% to 32% from its peak.

“We use a drop of 24% [to] 32% as our rule of thumb for a recessionary drawdown, since these numbers represent the median and average declines in the S&P 500 around recessions dating back to the 1930s,” they said.

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