The S&P 500 has yet to hit oversold levels, and there is little to no fear in the market, so it may have further to fall.

The S&P 500 May Fall Another 14%

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

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September 19, 2020

STOCKS – NONE

Macro – SPY

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Stocks had another rough week here in the US, with the S&P 500 falling 64 bps, adding on to last week’s drop of 2.5%. For the month, the index is down about 5.2%. Indeed, nothing to cry over given the big move higher we have seen since the March lows.

But there are at least a few internals signs that would suggest the selling may not be over, and that there is more to risk to the downside. For example, the advance/decline line has been making a series of lower highs, a sign the number of stocks moving higher is growing less extensive, but instead getting smaller.

The number of stocks above their 50-day moving is still around 51.5% in the S&P 500. This despite the index itself falling below the 50-day moving average on the S&P 500. During past periods of volality, we typically see this reading bottom out at lower levels.

Additionally, we have seen little if any fear building in the market, with a put to call ratio of 0.94. It would suggest that investors are still trading calls at a faster pace than puts. It is an indication that there is not much fear in the market.

Meanwhile, the VIX index confirms the notion that there has been little to no activity taking place in the options market with investors not looking to buy protection on the broader index. A VIX at 26 implies a daily move in the S&P 500 of around 1.6% over the next 30-days. To get the VIX moving up, we will need to see more put buying or greater volatility in the market. More put buying will lead to significant volatility.

Not Oversold

But even from a technical perspective, there may be more downside ahead with an RSI that is still around 43, well above the needed decline below 30 to indicate the index is oversold. Meanwhile, the index is still above its lower Bollinger Band, again suggesting the index is not oversold.

Flight To Safety

Additionally, there has been little to no flight to safety yet, with yields remaining unchanged.

While there has been little to no change in the dollar index.

2860

So how far could the S&P 500 fall? As I have discussed in the chatroom among subscribers, the level I am targeting is around the 2,860 region. That is where there is a rather large gap that needs to be filled from the middle of May. It would also mark about a 50% retracement off the lows from early March. (Premium content – Get The FIRST 2-WEEKS For Free – From 9/3 – A Drop To 2860 On The S&P 500 Is A Real Possibility)

By chance or not, that would also bring the S&P 500 2021 PE ratio back to 17.5, assuming $163 in earnings for the index next year.

At least, that is how I’m thinking about it at this moment in time.

-Mike

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