According to technical analysts, U.S. stocks are on the verge of breaking their longest streak without a significant pullback in nearly three years. This indicates that the summer selloff may not be over yet.
The S&P 500, a closely watched benchmark, is likely to close below its 50-day moving average on Tuesday. If this happens, it will be the first time since March 28, 2023, marking the end of a 96-day streak without a break below the moving average. The previous record was 102 sessions that ended on Sept. 17, 2020.
Analysts attribute the recent slide in stocks to a variety of factors, including rising long-dated Treasury yields and a stronger U.S. dollar. These have put pressure on stock valuations. Additionally, the largest U.S. companies have failed to meet high expectations for corporate earnings during the second quarter of the year.
In the past two weeks alone, the S&P 500 experienced its largest two-week point and percentage decline since March 17, 2023. Similarly, the Nasdaq 100, which has been the best-performing major U.S. equity index this year, saw its first significant decline since December.
Katie Stockton, founder of Fairlead Strategies and a market technician, points out that several medium-term momentum gauges have weakened since the beginning of August. This suggests that the pullback in stocks will likely continue for the time being.
While there is agreement among technical analysts that the decline will persist, there is some optimism that it may be a shorter-term correction rather than a prolonged downturn. Stockton believes that the corrective phase will likely last for weeks rather than months.
Some analysts also cite seasonal trends as a potential reason for continued pressure on stocks until the end of the quarter in late September.
S&P 500 Performance Trends and Market Insights
Historical data from Dow Jones reveals that September has consistently been the worst month for S&P 500 performance, going all the way back to 1928. Although data for periods prior to the index’s establishment in 1957 is based on a reconstructed return history, it still highlights a significant trend. On average, stocks have fallen by over 1.1% during September.
The preceding month of August also does not fare well, ranking as the fifth-worst month for the index. It typically sees a modest average gain of 0.67%.
In recent times, momentum indicators such as the 50-day and 200-day moving averages have become reliable indicators of market performance. Notably, last year the S&P 500 consistently experienced a sell-off shortly after either touching or surpassing its 200-day moving average.
Despite the potential for further declines, it is worth noting that there is still a considerable distance to go before the long-term trend faces any real threat. John Kosar, the chief market strategist at Asbury Research, emphasized this during a recent interview.
“We’ve got a lot of room to fall. The long-term trend is still solid,” Kosar revealed.
For those closely watching the S&P 500, the next crucial support level to monitor is estimated to be at 4,325. This level aligns with the high points reached in August 2022, as identified by Ari Wald, head of technical analysis at Oppenheimer & Co., and Kosar. Should stocks drop below this threshold, the next support is anticipated at 4,200, with 4,100 serving as the final line of defense. Any breach below 4,100 would force analysts to reevaluate the long-term trend that began on October 12th, when the index hit its lowest closing point of 3,577.03 in 52 weeks, according to FactSet.
“The market was overextended,” stated Kosar. “Hopefully we’ll get rid of some of the froth in the market and make for a nice buying opportunity in the fourth quarter.”
As of Tuesday afternoon, the S&P 500 was already down by 0.9% at 4,449, dipping below its 50-day moving average of 4,446.78, according to FactSet data.