The S&P 500 remains capped below its year-to-date high of 4195, and analysts at Credit Suisse maintain their bias of looking for a top, which will be confirmed if the index falls below the 4052/48 range. With the daily MACD momentum having turned lower, the broader risk is shifting towards a “risk off” phase, suggesting that investors are becoming more averse to riskier assets. The analysts’ bias stays lower for an eventual break below 4052/48, confirming a near-term top and setting the stage for a fall to test the 200-day moving average (DMA), which now sits at 3972.
In the bigger picture, if the S&P 500 drops below 3972, it could test support next at the 3843/09 range. A break below 3764 is seen as marking a much more significant top. However, if the index moves above 4195, it would now be seen as marking an important break higher, especially given the extreme net short positioning. This could clear the way for a test of the summer 2022 high and a 61.8% retracement of the entire 2022 fall at the 4312/4325 range.
The S&P 500 is currently trading at historically high levels, which has raised concerns among some investors about a potential downturn in the market. The index has been propelled higher in recent years by a combination of low interest rates, fiscal stimulus, and strong corporate earnings growth. However, these factors may not be able to sustain the market’s upward trajectory indefinitely.
Several factors could lead to a “risk off” phase as mentioned by the Credit Suisse analysts. These include inflation concerns, tightening monetary policy from the Federal Reserve, geopolitical risks, and a potential slowdown in corporate earnings growth. Inflation remains a key concern for investors as it could lead to higher interest rates, which could negatively impact equities.
Despite recent indications from the Federal Reserve that interest rate hikes may be further away than previously expected, any signs of a shift in monetary policy could quickly hit stock markets. Additionally, geopolitical risks, such as rising tensions between the US and China, could also weigh on investor sentiment and lead to a risk-off environment.
Furthermore, while corporate earnings have been strong in recent quarters, there is the potential for growth to slow in the coming months. This could be due to a range of factors, including supply chain disruptions, higher input costs, and labor shortages, which could all impact companies’ profitability and subsequently affect stock prices.
Considering all these factors, if a risk-off phase does materialize, it will be crucial for investors to keep a close eye on key support levels for the S&P 500 as outlined by the Credit Suisse analysts. Falling below these levels could signal a more significant downturn in the market and potential further losses for investors.
At the same time, it is important to remember that markets can remain resilient in the face of potential headwinds. If the S&P 500 manages to break above the 4195 level, this could suggest that equities still have room to run, particularly if some of the risk factors mentioned above do not materialize or are resolved favorably.
Ultimately, investors should closely monitor market developments and be prepared to adjust their portfolios accordingly in light of changing market dynamics. In a risk-off environment, investors may want to consider shifting their allocations toward more defensive assets, such as bonds or dividend-paying stocks, to help protect against potential losses.
On the other hand, if the S&P 500 pushes higher and continues its upward trajectory, investors could potentially benefit from increased exposure to growth-oriented stocks, as well as sectors that have historically performed well during periods of market strength. Overall, a successful investing strategy in the current market environment will likely involve staying nimble, closely monitoring key technical levels, as well as staying attuned to broader economic developments and market trends.
