The S&P500 at a crossroads

The main stock index of the Wall Street stock exchange, S&P500, together with the Nasdaq (NDSQ), is getting closer and closer to the support area of 3480 points i.e., a very interesting area to understand what the future of the index will be and whether it will be confirmed bearish or bullish.

The support of the above area corresponds to 50% of the Fibonacci retracement drawn over the entire bullish leg that started in March two years ago (2020) and then initiated a rebound.

Analysis of the S&P500 Index

The prices of the Standard & Poor’s 500 are basically at a crossroads, and touching that level could lead to a rebound of the index of even 400/500 points or conversely go in a continuous direction with the bearish trend and touch the 3200 mark, ever closer to Dimon’s nefarious vision.

Days ago, the prediction by JP Morgan CEO Jamie Dimon that markets could fall an additional 20% from current levels had caused a stir. 

Judging by what is in place, barring today’s substantial breakeven, the S&P500 is taking the words of the executive of America’s largest investment bank literally. 

The index that encompasses the 500 companies listed on the Wall Street exchange with the highest capitalization fell below 3600, which was the level that could have opened a chasm to a far more resounding descent and in line with the predictions of some analysts. 

Days ago, having broken through the above support the index stood at 3588 beginning a downward path that could lead it to reach the dreaded levels that Dimon had hypothesized but as we write it has reached 3583 currently losing 2.37% today compared to Friday’s session.

The bear market factor negatively affects the future of the major US indices and stocks by casting a shadow over them, we are now almost a year into a bear market, a market that started with 2022 but had been giving signals for months before.

Far from giving financial advice by reasoning with the numbers, we can glean something interesting and also useful to help us understand the fate of the Standard & Poor 500.

On average, bear markets have a duration of a year and a half albeit with exceptions of two years and, to be fair, even a little more than a year. Although this does not provide any certain parameter on which to rely, it suggests that the end of the tunnel can be placed between six months and a little less than a year.

This consideration may lead us to tend toward Dimon’s view, namely that it is likely that the main US index will touch 2800 points before we see the real rise again.

While the end of the bear market may be a matter of months, it does not mean that we necessarily have to look at the glass half empty, in fact trading opportunities are possible just as a rebound that would bring the index back to 3800 points may be plausible if it were to reach the supports I mentioned at the opening.

The relationship with the macroeconomic environment

The recent CPI data provided an additional plug in the past few days, the expected inflation figure was 8.1% whereas it came in at 8.2%. Initially, the news had shaken the markets, which within a single morning had encountered major losses, only to recover in the final session in view of the fact that the news had not been so bad.

While it is true that expectations have not been confirmed, it is also true that inflation continues to fall, a clear sign that monetary policies of raising rates to the tune of 75 basis points per session are paying off.

The combination of slightly but steadily declining inflation and a bear market with its months numbered is coupled with a strong dollar that is a ball and chain for US exports, creating quite a few problems for companies in the states and particularly those in the S&P 500.

All these factors suggest that for the index the future is still dangerous and does not have the basis to be bullish, nevertheless rebounds may be possible even at 3700/3800 points as suggested above.

The so-called “sisters” of the Standard & Poor 500 i.e. the Nasdaq and the Dow Jones are not sailing in better waters. Obviously, it is normal for there to be a correlation, especially considering macro data and this bearish phase also unites them in losses.

The Dow Jones drops 1.34% to 29634.83, while the Nasdaq fares worse, losing as much as 3.08% to 10,321.39.

The same fate as the above indexes for the Russell 2000, which is the small-cap stock market index that makes up the 2,000 smallest stocks in the Russell 3000 index, loses 2.66% to 1658.67.

Although the path of the Russell 2000 is common to that of the Standard & Poor 500, the losses seen in the small-cap sector affected smaller companies by capitalization mainly because of the difficulty in finding raw materials at competitive prices and the impact of energy bills, while, for the large indexes, those that count in the New York Stock Exchange these issues affected to a lesser degree.