S&P 500’s Floor Is Creaking as Trump Tweets Stocks Into Danger
U.S. equities have walked a well-trodden path in August. Now mile-markers on that road are being tested again.
(Bloomberg) -- As uncharted as the political terrain has been, U.S. equities have walked a well-trodden path in August, bound by a trading range that by some measures has lasted two years. Now mile-markers on that road are being tested again.
For the third time this month, a sell-off has pushed the S&P 500 below a level that matches its high-water mark from January 2018, meaning people who bought back then, during the biggest rally of Donald Trump’s presidency, remain stuck. Of greater interest to chart analysts, the index now sits just 7 points above lows set during earlier August plunges.
While none of the numbers are magic, analysts want to know if they’ll hold. Dip buyers stepped in when the S&P neared 2,840 twice before, fueled by optimism the economy is strong and the trade war resolvable. Whether they’ll be as confident after Trump tweeted that the U.S. would be “better off without“ China is an open question.
“You open up a trap door and then selling goes to the next level,” said Quincy Krosby, chief market strategist at Prudential Financial Inc. “The mode of the market is, ‘sell now, ask questions later.’” At the same time, she said, “If politicians in China and the U.S. can craft a trade message that the market can find coherent, then that would alleviate some of the concern.”
To be sure, the S&P 500 has bounced back strong from these levels before. When the index fell to 2,844 in early August, bulls sent the gauge 3.3% higher over the next three days. A virtually identical rally occurred again a week later when stocks fell to 2,840. The high point of the range was tested four times, to little success, but the bottom has been sturdy.
The Dow Jones Industrial Average lost 623 points on Friday after China slapped new tariffs on $75 billion of U.S. goods and Trump vowed to retaliate. After markets closed, he boosted levies on $300 billion of Chinese imports to 15% from 10%. Wall Street will decide when futures reopen at 6 p.m. in New York Sunday whether a 2.6% drop in the S&P 500 priced the president’s retaliation correctly.
Of course, to buy-and-hold investors with longer horizons, this month’s 97-point trading range is but a blip in an advance that has lifted the S&P 500 more than 700 points since Trump’s election. And technical analysts and chart watchers are far from united on where support lies.
Many are watching 2,820, twice an intraday low for the S&P 500 this month. If that’s breached, 2,800 becomes the line to watch, according to Frank Cappelleri, senior equity trader and market technician at Instinet LLC. It’s roughly the 200-day moving average that’s supported the gauge all year and also a spot where stocks peaked three times late last year.
“It’s good that there are downside reference points that are clear to market technicians -- 2820, then 2800, June low, May low,” Cappelleri said by phone. “What’s not so great is all the uncertainty along the way.”
While equities have been locked in a tight range this month, traders have felt their share of adrenaline. The S&P spent nine out of 17 trading sessions moving at least 1% in either direction. The last time that happened was in December, one of the worst months of the bull market.
Concern built on Friday that Trump is expanding his trade campaign to a point where he tries to control U.S. companies’ business decisions, said JonesTrading’s Michael O’Rourke. Trump took to Twitter following news of new tariffs and “hereby ordered” companies “to immediately start looking for an alternative to China.”
While maybe nothing more than bravura, it stuck in traders’ stomachs, according to O’Rourke. The tweets came minutes after Jerome Powell said the Federal Reserve will “act as appropriate” to sustain economic growth, killing a brief rally.
“The Fed chairman did what the market wanted to shore up confidence, but Trump erased that very quickly,” O’Rourke, chief market strategist at JonesTrading, said by phone. “Will companies have to get out of China and will they not be allowed to do businesses where it’s most cost-effective for them? Investors are losing confidence.”
To contact the reporter on this story: Elena Popina in New York at epopina@bloomberg.net
To contact the editor responsible for this story: Brad Olesen at bolesen3@bloomberg.net
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