S&P 500 downside risk

At Tricio we study charts as a way of gauging investor behaviour and sentiment. We also take the view that it is best to repair the roof when the sun is shining, making this a good time to review support levels in the S&P 500. Back in early April as stocks were tumbling hard on the back of the US ‘Liberation Day’ tariff announcement, our view was that ‘time in the market’ better serves long-term investors than ‘timing the market’.

However, that doesn’t mean that investors need to be punched in the face every time a big correction (a fall of over 20% or so) or an extended bear market (a fall of over 50% or so) happens. The monthly  long-term chart of the S&P 500 (below, semi-log with 12 and 60-month moving averages) shows that the big rise from the early 1980s remains intact (big blue channel). We spend a lot of time looking at the steeper bull channel from the 2009 low (red lines) in our webinars and client talks as this is most relevant to current outlooks. As a ‘cheat’ we can use the broad long-term channel and draw parallel lines from key highs or lows if they offer any potential insight. These are the purple line and the middle blue line on the chart below.

Our concern on this chart has been that pressure on the rising resistance line (cluster of red and purple lines) has seen the stock market rally pause on a few occasions. This time may not be different. Those with a bullish outlook though may be thinking 10,000 thoughts instead of course, the top of the very long-term rising channel! For those looking at pullback risks, the rising line near 5,000 is near the April 4,835 low with the 60-month moving average near 4,600. If these give way, this chart shows further potential support lines near 4,000 (red line) and then 2,085 (bottom line, from the very long-term rising channel). 

The weekly chart below may be a bit more useful for tactical decision making. The 13 and 50-week moving averages are always good to note (bull cross again) as they may offer support on small pullbacks. The orange box on the chart shows some highs and lows where the index paused on previous occasions and the gap from the mid-May ‘pop’ (US gave China tariffs more time to be enacted, stocks jumped higher on the Monday). This makes the 5,760/5,660 levels a potential trigger point for bigger losses if broken. Rising green line support near 5,000 is close to the long-term channel line and with the April low near 4,835 should mark a big ‘line in the sand’ for investors now.

Are we looking for a big selloff? Not really, but given the twists and turns of US policy making, investors (unfortunately) need to stay on their toes. No going away for a long beach holiday through August and hoping that nothing happens. The current approach to resistance lines, which is coinciding with valuation measures looking very rich again, may encourage portfolio adjustments and position squaring. If the fundamentals for the economy and stock market deteriorate badly though, watch the orange box as a sentiment indicator, with the 5,000/4,835 levels looking very important to hold below this now.