The recent decline in the S&P 500 has left many investors wondering when the stock-market turmoil will subside. In a recent report, Victor Cossel of Seaport Research Partners shared some technical charts that might shed light on the timing of a potential turnaround. Unfortunately, the analysis suggests that there may be more pain ahead, unless the upward trajectory of Treasury yields and the U.S. dollar comes to an end.
One crucial indicator to watch is the percentage of Nasdaq 100 components trading below their 200-day average. Currently, this figure needs to catch up with the number of S&P 500 and Russell 2000 members trading below their respective 200 DMAs. Moving averages are commonly used by analysts to assess the directional momentum of securities. By examining these trends among index components, analysts can gain insight into the degree to which an index’s performance relies on a small core group of stocks—a pattern that has been prevalent in U.S. equities throughout the year due to the prominence of what analysts have dubbed the “Magnificent Seven.”
The “Magnificent Seven” refers to a group of mega-cap technology stocks that have experienced significant growth thanks to the artificial intelligence frenzy. This elite group includes Nvidia Corp., Microsoft Corp., Apple Inc., Meta Platforms Inc., Tesla Inc., Amazon.com Inc., and Alphabet Inc.’s Class A and Class C shares.
According to Cossel’s most recent data, accurate as of Monday’s closing bell, 61% of Nasdaq 100 members were still trading above their 200-day moving averages, compared to 45% for the S&P 500 and 35% for the Russell 2000. It’s worth noting that these numbers may have shifted slightly following Tuesday’s market rout.
In the face of mounting selling pressure, traders will be closely monitoring whether the S&P 500 can hold its ground at the key support level of 4,200. This level has historically provided strong long-term support for the large-cap index.
While investors hope for a swift recovery, the technical charts paint a less optimistic picture. Unless there is a change in the upward trend of Treasury yields and the U.S. dollar, it seems that the stock market will continue to face challenges in the near future.
A Warning for Stocks as Momentum Falters
A potential break below the 4,200 mark could spell trouble for stocks in the near future. This would be seen as a signal that momentum is gathering on the downside, causing concern among traders.
The Federal Reserve’s recent guidance on keeping interest rates higher for an extended period was partly influenced by the frothy conditions in the market. However, it seems that some of this frothiness is starting to dissipate.
On Tuesday, the S&P 500 information-technology sector officially entered correction territory, closing at 2,869.6 after a 1.8% decline. This drop brought the index down by 10.5% from its 52-week high of 3,207.29. A correction territory is defined as a decline of 10% or more from recent highs.
The recent moves in Treasury yields and the dollar have been widely attributed to the central bank’s plans for interest rates, unveiled after its September policy meeting.
Rising real rates, which take into account inflation-adjusted bond yields, could continue to pose problems for stocks. According to a chart presented by Cossel earlier this week, the S&P 500’s valuation on a forward price-to-earnings basis appears stretched relative to where 10-year real rates are currently trading.
Cossel used the 10-year nominal Treasury yield adjusted for the 10-year breakeven spread as a measure of the 10-year real rate in question.
Considering these factors, Cossel expressed concern about the vulnerability of the S&P 500 at its current levels.
The U.S. stock market experienced significant losses on Tuesday, with the Dow Jones Industrial Average seeing its largest daily drop since March. Treasury yields also rose, and the ICE U.S. Dollar Index reached its highest level in 10 months.
The Dow Jones Industrial Average fell by 338 points, or 1.1%, closing at 33,618.88. The S&P 500 shed 63.91 points, or 1.5%, ending at 4,273.53. Meanwhile, the Nasdaq Composite dropped by 207.71 points, or 1.6%, settling at 13,063.61.
