The global financial market is perpetually unpredictable and possesses a certain level of uncertainty. This volatility is particularly conspicuous in the stock market, where a plethora of factors can cause abrupt shifts in value. One primary victim of this swivelling tide is the S&P 500. Several market watchers and analysts have recently highlighted that different charts have been flashing a No Go for the S&P 500, projecting a future of instability.
Firstly, it is crucial to understand what the S&P 500 represents. It is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. Considered as one of the best representations of the U.S. stock market, any significant change in the S&P 500’s trajectory often reflects the overall market condition.
One ominous sign for the S&P 500 is the skew index. Pioneered and published by the Chicago Board Options Exchange (CBOE), this index measures the perceived tail risk of the distribution of S&P 500 logarithmic returns. Similarly, an increased skew indicates a heightened expectation of extreme outcomes, a sign of potential market instability. Recently, the skew index has risen to worryingly high levels, suggesting that traders foresee higher risks on the horizon.
Another chart to take into consideration is the Relative Strength Index (RSI). This momentum oscillator measures the speed and change of price movements, where a reading above 70 typically indicates an overbought condition and a reading below 30 represents an oversold condition. Currently, the RSovalley on the S&P 500 chart stands at 60.7, approaching the overbought threshold. This scenario often precedes sharp price drops, presenting another flashing warning sign for the S&P 500.
The CBOE Volatility Index (VIX), commonly referred to as the ‘fear index’, is another crucial indicator. An increase in this index suggests growing investor anxiety, leading to potential market volatility. While the VIX remains relatively calm for now, a sudden spike could swiftly turn the tables. Any patterns of increasing VIX levels should be cautiously noted.
Moreover, the moving averages are signalling a bearish trend too. The 50-day moving average and 200-day moving average are widely deployed technical analysis tools. They help filter out the ‘noise’ from random price fluctuations and provide a smoother representation of an asset’s prevailing trend. Presently, the S&P 500’s 50-day moving average has dipped below its 200-day moving average, which can be a significant red flag indicating a bearish market sentiment.
In addition, the rising yield of 10-Years US Treasury Bonds is another suggestive factor. The bond market and stock market often move inversely, meaning that when bond yields increase, it can put pressure on the stock market. The reason is simple: higher bond yields make bonds more appealing to investors, potentially pulling them away from investing in stocks.
Furthermore, constant monitoring of the Federal Reserve’s possible action is also key. This year, inflation has reared its head and showed alarming signs. In response, if the Fed decides to raise interest rates to combat inflation, it could put the brakes on the surging stock market.
In light of all these indicators, it appears that complex charts are flashing a dominant No Go sign for the S&P 500. They suggest a period of turbulence and potential downfall for this leading U.S. stock market index. A collective consideration of these factors projects the need for cautious trading and a wise investment strategy. While it’s not a call for total abandonment, it’s certainly a call for measured decision-making based on sound market analysis and not simply optimistic sentiments.
