The S&P 500 index (SPX) crossed below its 50-day moving average for the first time since its breakout in early November of last year. While the index has been trading lower since early March, the breakdown marks a key technical turning point for the popular benchmark index.
The index trades near its lower trend line support, which if broken, could lead to significant downturn over the coming weeks. The next minor support levels stand at 2300, which represents a nearly 2% or roughly 50-point decline from its current levels. The next major support may be its 200-day moving average that is about 5% lower, or roughly 120 points.
A crossover of the 50-day moving average below the 200-day moving average could also signal an even more bearish long-term reversal. The last time that happened was in late-2015 and early-2016 when the index made a couple bottom that was a precursor to its current rally higher. Prior to that rally, the index traded below 2000 levels for some time, which is more than 345 points below the index’s current levels of 2345.
On a fundamental level, the recent declines have been widely attributed to rising political uncertainty as President Trump intervened in Syria and upset Russia. These actions have also depressed hopes for a domestic-only agenda whereby reduced red tape and infrastructure spending could boost the economy. Finally, Trump’s recent comments about China have also sparked concerns over a trade war that could hurt the dollar’s valuation and economy. (See also: Saxo Bank: 60% Chance of Global Recession.)
The S&P 500 also trades at a lofty price-earnings multiple by historical standards at 26.33x, compared to its mean of 15.65x and its medium of 14.65x, according to Multpl.com data. The last time earnings multiples were so high was before the 2000 dot-com bubble and the 2009 global financial crisis. On the other hand, first quarter earnings growth is expected to be 8.9% – its highest earnings growth since the fourth quarter of 2013, according to FactSet.
Top chart courtesy of StockCharts.com; bottom chart courtesy of Multpl.com. Author holds the S&P 500 index’s components in various funds.