S&P 500: Worst 5-Months in 50 Years: What Next?

US stocks have had the worst opening five months in 50 years but is some relief at hand or does it get worse from here? 

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Traders are naturally wondering when the stock market will hit the bottom. Let’s look at the cause for the drop and how things could look moving forwards.

Is it all the Fed?

It might be comforting to blame the whole thing on tighter monetary policy, but single-variable analysis often doesn't work in a complex system like financial markets. Certainly, the increasing cost to obtain money to invest in the stock market plays an important role. But there has been a series of disconcerting events that have weighed on investor sentiment. 

One of the more recent was the series of lockdowns across China complicating the recovery of supply chains. Even as there was some hope of optimism earlier this week, China doubled down on its zero covid policy, hurting risk sentiment. The theme has been a switch from high valuation tech stocks to value stocks which are mostly industrials. That switch has hit a major snag as industrials are facing renewed supply chain concerns that could weigh on their bottom line during the crucial consumer season later in the year.

What now?

US consumers are borrowing at ever faster rates to keep up with higher prices. During the last recession, credit card delinquencies actually dropped as the economy contracted while supply chain problems had retail inventories hit a record high. But the reality is retailers are facing a problem of undersupply in some areas and oversupply in others, creating somewhat unbalanced circumstances.

With the fundamentals painting a less optimistic picture, hopes of a rally in stocks might be pinned on the phenomenon of bad news could be good news. That is, if economic indicators get bad enough, the Fed might tone down its hiking cycle, and a softening of the longer end of the curve might bring some investment back to the stock market. However, we might have to wait until the Q2 GDP figures to get any substantial guidance in that area.

SPX500 still in bear market

Technicals are a little clearer. The SPX has been in a bear market since the ‘death cross’ in February. The early March breakout above the 200-day average proved to be fake and from there it’s been a downward spiral below the 50-day, suggesting downtrend acceleration. We saw a recent rally up above the 4k handle, but the SMA at 4150 repelled bulls. Now, we look bearish again, but will it last?

The swing low of 3800, which is also the 38.2% Fibonacci retracement of the 2200-4800 leg, is major support. If we lose it, the 50% and 61.8% at 3500 and 3200 are next. But the outlook will be more bearish too. 

If, however, the bullish CCI signal holds true and price manages to bounce from the 3800-4000 zone, a reversal could be seen. The 50-day would offer the first struggle, and then the 4300.

Key takeaways

There are a variety of reasons that investors have been selling stocks, but some of the more recent ones apart from the Fed have been China's new lockdowns. The realities of the current economic situation are painting a less optimistic picture, with hopes of a rally pinned on bad news being good news and a resulting pause in rate hikes.