The S&P 500 hit new lows on Oct. 13 after a hot inflation report. Is a bottom nearby?
The S&P 500 can often buck the bad news, especially when it’s just one or two negative catalysts. But when the headwinds start to pile up — geopolitical turmoil, raging inflation and a hawkish Fed — the stock market can really struggle.
In an effort to combat stubbornly high inflation, the Federal Reserve has embarked on a rate-hiking spree. That has propelled the U.S. dollar higher, almost 20% on the year.
This morning’s inflation report sent the stock market tumbling, with the S&P 500 hitting 2022 lows. And then investors turned around and sent stocks roaring higher.
After that kind of whipsaw, it’s worth asking where the low may be.
When To Buy the S&P 500
Weekly chart of the S&P 500 ETF (SPY).
Chart courtesy of TrendSpider.com
On the technical side of things, we’re finally getting the flush down to the 3,500 area in the S&P 500 and $350 in the SPDR S&P 500 ETF (SPY) – Get S&P 500 ETF TRUST ETF Report. The latter is charted above.
Back in June we said, “If this is not the low and we trade below 3,795 — be it next month or in several months — then we have to consider the possibility that 3,400 to 3,500 is in play. There, we will find a bevy of levels that should support the S&P 500.”
Well, it did take several months, but here we are into a bevy of potential support areas.
While we’re a bit below the 200-week moving average, there’s also the 50-month moving average in play, the 50% retracement from the all-time high down to the covid low in March 2020 and the major breakout level near $350.
At Thursday’s low, the S&P 500 was down about 27.5% from the highs.
For some long-term investors, this is enough of a decline to start allocating some funds to the S&P 500. For traders, this key support level is a viable risk/reward spot to increase their long exposure.
If it holds, I want to see the SPY reclaim the June low near $362, then potentially make a push to the declining 10-week moving average near $375.
If support fails to hold, the pre-covid high comes into play near $339, followed by the $325 to $318 zone, the latter of which contains the 61.8% retracement.
Stocks Still Face Risks
While there are some reasons to be bullish from a technical perspective, it’s impossible to ignore some of the not-so-pleasant realities.
Inflation remains hot and the Fed remains hawkish. That said, the Fed is likely closer to the end of its rate-hike cycle than it is to the beginning. Even though the Fed plans to maintain those rate levels for a while, a pause will bode well for stocks.
We also need to see short-term yields stop running to the upside, as the two-year and 10-year Treasury yields both hit new 2022 highs today.
The other reality is that over the past 60 years or so, a bear market alongside a recession tends to hit the S&P 500 to the tune of ~36%. While that’s admittedly just an average, we are still notably short of that threshold and it’s something to keep in mind.
Lastly, while one can start making a case for some long allocations, one cannot properly account for a so-called black-swan event.
The issues brewing in the U.K. financial system, Credit Suisse or some other entity that’s unknown right now (a fund, government, bank, etc.) could present a difficult overnight risk. So could an escalation in the Russia/Ukraine conflict or a rise in tension between China and Taiwan.
So while it’s difficult to account for those scenarios in trading, they’re certainly things for investors to keep in mind.
