We had been worried about a more sizeable downside move in the months ahead but had been forced to stay positive due to the strength of the near term underlying trends. This has now changed. A great deal of technical damage has taken place in the markets in recent days and more looks set to come.
The first warning sign was on Thursday last week, The US markets started a little higher and things looked set for yet another “buy on dip” rally, however through the day the selling gained momentum and we ended Thursday sharply lower. This selling then continued on Friday.
The VIX has shot up in recent hours and is now over 50. The VIX had been at extraordinarily low levels for an extended time, and many seem to have been caught by the size and speed of the break. There are concerns that many larger firms have been caught out by the changing conditions of the Yen/$ carry trade and are being forced to exit positions.
There is now a greater than 50% chance in our opinion that the recent July highs will be the highs for the year. How low can the S&P 500 go?
The S&P 500 has pushed on from 4,100 in November last year, in times of market disruption a 50% retracement of the last major move is commonplace. So a move down toward 4,900 seems a natural resting area, and this is also close to the April 2024 lows. With the 38.2-61.8 band around this 50% level between 5,100 – 4,700.
If the US recession turns into more of a hard landing than the Fed hoped for soft landing then the 4,700 lower area could also be vulnerable. But as things stand at the moment the 4,900 area seems to be a natural resting area to catch much of the current nervousness while the markets will take some time to digest to the new higher volatility environment. In short we do now seem to have entered into a sell on rallies stance for the more active traders, the buy on dip followers may have a tough few weeks ahead.