By Jacob Sonenshine
June 26, 2023
The stock market is dipping from its recent peak, which isn’t unusual during the course of a bull-market run. Still, there are levels that investors should worry about if prices fall that far.
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The S&P 500 is down about 2% from the high just short of 4450 it touched in mid June. The market benchmark hadn’t touched that level since April 2022, and it took a double-digit rally from the bear-market low reached in early October to get there.
The optimism behind that gain comes from the fact that the Federal Reserve has stopped raising interest rates for the moment in response to declines in the rate of inflation. Fed officials have indicated the bank is nearing the end of its monetary tightening campaign, so hope has mounted that growth in both the economy and corporate profits could soon stabilize, even if there is a mild recession first.
“The market is awash in bullish sentiment,” wrote Ryan Belanger, founder and managing principal at Claro Advisors, a financial advisory firm. The time when everyone is already becoming bullish is usually when the market begins to run out of buyers to send it higher for some time, so the recent decline in stocks is no surprise.
The question now is whether this is a mere breather from recent gains or the start of a larger drop. “Is this a new bull market or massive bull trap?” wrote Tom Essaye, founder of Sevens Reports, a research firm.
Monitoring key technical levels is one way to tell the difference.
Right now, the S&P 500 is holding above 4300, a level it hadn’t seen since August, when Fed Chairman Jerome Powell triggered selling by reminding investors that the central bank wasn’t nearly finished lifting rates. If the index holds above that level now, it means market participants remain confident enough in the economic and market outlook to keep buying at current prices.
A drop below 4300 could send stocks down to 4200, which would already represent a healthy pullback from the recent peak, but failure to hold that level would open the door to even steeper losses. It took over a dozen tries for the index to shoot above 4200 as it rebounded from its 2022 losses.
A slide lower might mean that the market is losing confidence, either because of disappointing corporate earnings or because of signals from the Fed that more rate increases than investors had expected are on the way. Higher rates cut into demand for goods and services, so the economy and corporate profits would suffer.
What happens if 4200 doesn’t hold? The next so-called support level for the index is 10% below that point at 3800. Roughly 3800, give or take, is where buyers stepped in several times at the end of 2022, supporting stocks after brief declines.
It likely would require a recession, mild or not, to take the market lower still, so for the moment, market participants have the 3800 level in mind for buying more stocks. It would represent a roughly 14% drop from the recent peak this month.
“We are looking for a drop to 3700-3800 support in the second half,” wrote Jason Hunter, technical market strategist at J.P. Morgan . If it comes without a recession, a slide that far would present an opportunity for those who have missed out on the recent rally.
Don’t count on it going that low.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This Barron's article was legally licensed by AdvisorStream.
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