Why stock bears are targeting June lows after the S&P 500 fell back below 3,900

“Over the past three years, the level on the [S&P 500] with the largest volume traded was 3,900. It closed below that on Friday for the first time since July 18, which we believe opens the door for June lows” near 3,640, said Jonathan Krinsky, chief market technician at BTIG, in a Sunday note (see chart below).

The S&P 500 SPX,
-0.72%
ended Friday at 3,873.33 – down 0.7% for the session and 4.8% for the week for its lowest close since July 18. That left the index up 5.7% from its June 16 closing low of 3,666.77. The S&P 500 hit an intraday low for selling at 3,636.87 on June 17, according to FactSet.

The Dow Jones Industrial Average DJIA,
-0.45%
fell 4.1% last week to end Friday at 30,822.42, while the Nasdaq Composite COMP,
-0.90%
saw a weekly decline of 5.5% to 11,448.40. Futures on stock market indices ES00,
-0.19%

YM00,
-0.12%

NQ00,
-0.42%
were trading flat to a bit late on Sunday.

A return to June lows is unlikely to be a straight line, Krinsky wrote, but the lack of noticeable “panic” so far in the Cboe VIX volatility index,
+0.11%
the futures curve and lack of a decline to more extreme oversold conditions, as measured by the monthly Relative Strength Index, does not bode well, he said.

Other analysts noted the lack of a bigger rise in the VIX spot, often referred to as Wall Street’s “fear gauge.” The options-based VIX ended Friday at 10:30 p.m. after trading as high as 28.42, above its long-term average near 20 but well below the panic levels often seen near market lows. above 40.

Stocks had rebounded strongly from lows in June, which saw the S&P 500 down 23.6% from its January 3 high at 4,796.56. Krinsky and other chart watchers had noted that the S&P 500 in August had completed a more than 50% retracement of its fall from the January high to the June low – a move that in the past had not been followed by a new low.

Krinsky at the time, however, cautioned against continuing the rebound, writing on August 11 that “the tactical risk/reward looks poor to us here.”

Michael Kramer, founder of Mott Capital Management, warned in a note last week that a close below 3,900 would set up a test of support at 3,835, “where is the next big gap to close in the market. “.

Stocks fell sharply last week after a Tuesday reading of the August consumer price index showed inflation was higher than expected. The data cemented the Federal Reserve’s expectations for another 75 basis point, or 0.75 percentage point, hike in the federal funds rate, with some traders and analysts eyeing a 100 basis point hike when policymakers complete a two-day meeting on Wednesday.

Insight: The Fed is ready to tell us how badly the economy will suffer. It still won’t hint at the recession.

The market’s rebound from its June lows came as some investors grew more confident in a Goldilocks scenario in which Fed policy tightening would wipe out inflation in a relatively short time. For the bulls, the hope was that the Fed would be able to “pivot” away from rate hikes, thus avoiding a recession.

Stubborn inflation readings left investors raising their expectations of where they thought rates would top, heightening fears of a recession or a sharp downturn. Aggressive tightening by other major central banks fueled fears of a broad-based global slowdown.

See: Can the Fed control inflation without crushing the stock market? What investors need to know.

Hear Ray Dalio at the Best New Ideas in Money Festival on September 21-22 in New York City. The hedge fund pioneer has a strong opinion on the direction the economy is taking.