Ghastly breakout!

Traders were expecting volatility on the high side, but most did not anticipate the big downside breakouts on all major US indices yesterday.

Dow, S&P, Nasdaq and Russell all plunged through their major lateral support yesterday. For the Dow, the 2% fall took out the 24,000 round number support (see below). Judging from the speed of its recent decline, it appears the bears are not done yet. A pierce through the 23,500 floor this week is still possible.

For the S&P 500, the index has slumped beneath 2,600 to close at its weakest level since Sep’17 (see below). This means that SPX’s medium-term momentum is strongly negative, as 52-week lows always are.

What now?

Earlier, I pointed out (here) that a recovery in equity markets depends on three things: a) Corporate earnings, b) Interest rates/energy prices, and c) Tariffs war.

It appears that, while rates/energy prices are falling, corporate earnings are disappointing, especially here in the UK. Many stocks have suffered massive one-day share price declines on weaker-than-expected results, such as ASOS, which was down 40% Monday.

In the face of significant market deterioration, the Fed may try to stem the tide by pausing rate hikes (Powell Put?). But this will take time to filter through to the general market and economy. Due to high volatility, be careful about chasing the market to the downside now.

 

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Jackson has over 10 years experience as a financial analyst. Previously a director of Stockcube Research as head of Investors Intelligence providing market timing advice and research to some of the world largest institutions and hedge funds.

Expertise: Global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.

Jackson has a PhD in Finance from Durham University.