S&P 500 flirts with bear market as Wall Street generals get picked up one by one

U.S. EQUITY OUTLOOK:

  • The S&P 500, Nasdaq 100 and Dow Jones lose ground on Thursday, but end the day well off their lows
  • The S&P 500 is on the brink of entering bear market territory as Wall Street’s generals are eliminated one by one
  • With investor sentiment deteriorating, risk appetite should remain depressed in the near term

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US stocks had another ugly day on Thursday, amid risk-free sentiment and a sellout on Wall Street. After oscillating between small gains and losses in morning trading, the tussle resolved lower, with all three major stock averages posting their weakest close of the year.

Ultimately, the S&P 500 fell 0.13% to 3,930, recovering from a 1.8% drop that had caused the index to flirt with the bear market, a period of prolonged declines in which an asset has fallen 20% or more from a recent high. Although a bear market does not by itself predict future returns, it can certainly increase investor pessimism and further reduce risk appetite, especially if the condition afflicts the most important reference in the world.

The Nasdaq 100, after erasing a drop more than 2%, was down 0.18% at 11,945. During the session, US yields fell across the curve, pushing Treasury prices higher, but the tech sector did not could not take advantage of it as the move was tied to safe-haven demand amid growing fears that the US economy is heading for a hard landing.

No stock has been immune to widespread selling pressure lately, not even leading Wall Street generals, which are often seen as safer bets. For example, Apple, Microsoft and Alphabet have plunged 22%, 24% and 25% respectively from their 2022 highs. Amazon, another tech darling, did the worst, falling nearly 37% from at its annual peak. As mega-cap stocks tumble and puncture one technical support after another, the S&P 500 and Nasdaq 100 will remain biased lower in the near term.

As for the catalysts, the drivers remain the same: stagflation and the nervousness of the Fed. Traders are increasingly convinced that the inflationary environment will require a stronger policy response, which could lead to a recession, a dire scenario for the US consumer and, of course, corporate earnings. It doesn’t matter that excessive pessimism is justified, what matters now is that traders are convinced that trouble is coming and act accordingly by buying downside protection and avoiding stocks.

With no relevant US economic data or key Fedspeak for the next two days, sentiment will remain fragile, preventing any meaningful rebound in risk assets. Against this backdrop, the S&P 500 and Nasdaq 100 could extend losses into next week.

Earlier in this article, we discussed the possibility of the S&P 500 entering bearish territory. For the 20% decline condition to be met, the index will need to break below the 3,855 area. Looking at the daily chart below, we can see why this is problematic: just around these levels, we have a corresponding key technical support March 25, 2020 swing low. Should this floor be removed, sellers may accelerate the move lower, with the next notable barrier at 3,800, followed by 3,725.

On the other hand, if the bearish buyers return to take advantage of the oversold condition and trigger a bullish reversal, the first resistance to consider is at 3980 and then at 4060.

S&P 500 TECHNICAL CHART

S&P 500 technical chart prepared using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX

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