As S&P 500 Flails Toward Year-End, Chartists See No Relief Ahead
(Bloomberg) -- With this week’s wild swings in the S&P 500 Index, a lot of investors are asking if the two-month sell-off has run its course. To some of Wall Street’s most closely followed technical analysts, the answer is: not yet.
Take yesterday’s huge intraday reversal, for example. During the initial 2.9 percent plunge, investors showed no urge to hedge against losses in the options market, an indication that a washout in sentiment that usually sets the stage for a sustained recovery is still absent, according to Jeff deGraaf at Renaissance Macro Research. Then, as the market bounced back, the risk-off mood continued, with large-cap stocks beating their smaller counterparts and stocks with low volatility outperforming.
“Leadership was more of the same and was uncharacteristic from what you would see from a low,” said deGraaf, whose advice to fade the rally in early November proved prescient. “Until we see a change in leadership accompanied by an internal washout we remain cautious.”
While the S&P 500 dropped as much as 6 percent over the last two days, a Cboe measure of options trading showed puts outnumbered calls by a ratio of 1.08-to-1. That’s far from levels reached during past sell-offs. For instance, the gauge spiked to 1.5 during the February rout this year and reached 1.7 over the 2015-2016 correction.
A slump in stocks in the fourth quarter has turned a good year to a bad one for many fund managers. Down almost 1 percent since January, the S&P 500 is heading for one of the worst annual performances since the bull market began in 2009.
With about three weeks remaining in the year, hopes for a market bottom are high. But the reality is that the momentum doesn’t bode well for bulls. At the worst point Thursday, the S&P 500 undercut its November trough, forming a lower low that signals a potential deterioration in trends. It contrasts with the previous bottoming process from February to April, when the index’s intraday lows showed an upward trend.
“We received many queries as to whether the intraday action looked capitulative to us, and the answer was a resounding ‘no,’ ” said Russ Visch at BMO Capital Markets. “The major averages ended the day well above their intraday lows, but the action was still unquestionably negative. We do not view yesterday’s late rally as a true reversal either, since you need an extended decline beforehand. With short-term indicators still deteriorating the bias remains to the downside here.”
Over the course of the past two months, the S&P 500 has traded below its 200-day average for all but a handful of days. So much damage has been done that the longer the index stays below that widely watched threshold, the more danger is likely.
While Thursday’s intraday reversal was impressive, John Kolovos at Macro Risk Advisors found that similar patterns tend to be clustered when the market is in a downtrend.
“Longer-term structure of the market remained weak,” he said. “It is up to the bulls to plead their case and while yesterday was a good opening argument, the weight of the evidence continues to suggest an eventual breakdown.”
How much lower can the market go? Stephen Suttmeier at Bank of America sees the S&P 500 falling to somewhere near 2,350 next year. That would represent a decline of roughly 20 percent from an all-time high reached in September. While a bounce is likely, it may not last, he said.
“The next rally in the S&P 500 into the 2,800s can be sold,” he wrote in a note to clients.
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