Why the stock price decline isn’t over yet

Retail sales were also part of the problem, as higher-than-expected consumer spending raised concerns that inflation would remain high and prevent the Federal Reserve from cutting interest rates. Rising tensions between Iran and Israel in the Middle East were also worrying investors.

There’s a good reason for that.

“Stock prices are caught between a strong U.S. economy, which allows for inflation, and concerns about broader Middle East conflict, which creates the preconditions for a recession,” said DataTrek co-founder Nicholas Raab. writes.

In a memo on Tuesday, he noted:

CBOE Volatility Index,

It measures implicit volatility and is sometimes referred to as the market’s fear gauge, and it closed at 19.2 on Monday. While this represented an increase for the day, it was still below the long-term average level of 20 or the one-year closing high of 21.7 set at the market low in October.

Despite these concerns, the fact that the VIX index is not near all-time highs “suggests that markets are likely to remain volatile for at least the next few days,” he said. warns.

Similarly, Joe Mazzola, a director at Charles Schwab, said Tuesday that after the S&P 500 index posted “dramatic losses” in three of the past four business days, the index is now in a five-day decline for the first time since November. He pointed out that it was below the moving average.

This is “a sign of technical weakness with the possibility of spillover today. The lack of buying interest in the closing stages yesterday suggests that the ‘buy on the buy’ sentiment may be waning.” he writes. “The S&P 500 is now within striking distance of its first 5% decline from its highest since October of last year.”

So far, the S&P 500 index is down about 3.7% in April. But even after a record first quarter, the index is still up more than 6% for the year.

That may be reassuring to some, says Marko Kolanovic, head of JPMorgan.
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The Global Market Strategy team has warned of a “disconnect” between stocks and growing potential headwinds.

“For a market that relies on complete inflation deflation, a dovish Fed response function, and reduced tail risks to growth, continued strong growth and inflation data will lead to a tightening of the stock-versus-bond risk premium. could eventually reach a tipping point that creates a market correction,” he writes. Further, investor positioning has increased and cash allocations are at historic lows.

As a result, he remains defensive in his positioning, with an underweight in equities in favor of commodities and cash.

Ross LaDuke, global strategist at Vermilion Research, doesn’t think investors should panic just yet, but says warning signs are flashing. He writes that you should look at the S&P 500.

Nasdaq 100

It’s been below the 20-day moving average and the 21-day exponential moving average (the latter weighs more current data) for more than a few days in a row, making us more cautious.

Monday and Friday were two days in a row, so “we need to be careful,” he wrote.

Nevertheless, a more meaningful pullback would require a break around the current two-month support level, which is currently testing the S&P 500’s 4983-5050 points, to allow for a larger decline. he claims. “Only then would the possibility of the S&P 500 heading towards the 4800 major support open up. And it is important to note that even if that scenario materializes, we would view it as a buying opportunity. is.”

So long-term investors, rejoice. But don’t forget to buckle up.

Email Teresa Rivas at teresa.rivas@barrons.com.