All-Time-High Or A Correction In The S&P 500?

S&P 500 Resists Downside Pressure

The S&P 500 ended on a high note last week, albeit on low trading volume on Friday.

However, there is downside most likely coming for the index.

While there are no certainties in the financial markets, fundamental and technical analysis can inform probability.

The reversal engulfing candle on Thursday, 31 July, remains a strong signal.

However, the low of Friday, 1 August has not been confirmed with a new low.

From a technical analysis perspective, the index is forming a bear flag, and the probability of a correction to the downside is sitting at around 70%.

From a fundamental perspective, tariffs on around 70 countries came into effect last week.

The average tariff rate has effectively jumped to 18%, the highest level since 1933.

In addition, a 100% tariff now applies to chips if the chip companies are not building in the U.S.

That said, tariffs are currently having little impact on markets.

Earnings And Valuations

Earnings for the second quarter are looking very positive. 89% of stocks in the S&P 500 have reported with average earnings and margin growth of 12%.

Stocks with AI exposure have seen a 26% increase in year-to-date returns.

At two standard deviations from the norm, the index is sitting at historically high valuations.

Stocks are priced to perfection, and stocks that have disappointed on earnings have experienced sharp corrections in price.  

Seasonally, volatility is high during August and September, and the August following the election year is historically negative.

S&P 500 Key Levels

The S&P 500 opens in positive gamma today.

The gamma flip zone sits at 6200; the call resistance level is 6400, and the put support level is 6050.

The 6400 level is offering significant resistance. There is likely liquidity above this level, and the market may attempt to tap into it before selling off again.

CPI and PPI will likely determine the direction of markets this week.

As noted above, from a technical analysis perspective, the most recent price action on the daily chart does signal caution.

While the weight of probability is momentum to the downside, the daily, weekly and monthly charts remain in bull trends.

The retail buy-the-dip psychology remains strong. The FED and the government have conditioned traders to buy the dip. On that basis, expect chop consolidation to be a feature.

Human emotion rules. It doesn’t change. Greed and fear don’t change.

Investor and trading behaviours don’t change in market bubbles.