S&P500 Slumps 9% From Highs, How Much Worse Can It Get? – S&P500 Analysis & Prediction

Key Points

• Markets are slumping fast; is there a recession on the cards?
• All eyes are on the services PMI after a much weaker manufacturing PMI last week.
• How much worse can it get for the S&P500? 
• Is it too brave to buy the dip right now?

Market Overview

There are now two ways about it: Something changed last week. Let’s take a look at the evidence: Crude Oil recorded its fifth straight week of losses, the Volatility Index (VIX) spiked 42%, the Bank of Japan hiked rates, the weakest Non-Farm payrolls print since February 2021, and I could go on. What has this led to? Fear. Fear causes selling, and selling in this veracity creates more selling. The VIX is up another 30%, and Wall Street is down badly this morning.

It is important in times like these to keep your emotions in check; it is in no way a done deal that a recession is on the cards, i.e., a soft landing is off the table. However, it doesn’t need to be to cause the moves we are seeing; the fact that recession talk is on the table is enough for investors to turn defensive. To put things into perspective, the S&P500 is still up over 10% this year…

All Eyes On Services PMI

It is a much quieter week in the economic calendars this week, but judging by the early moves we are seeing, the markets will be full of life. Later today, the ISM Services PMI will be in focus as it will give the public an idea of the condition of the services sector following the recent weaker data. The forecast is optimistic, with the services PMI expected to be 51.4, beating the previous print of 48.8. This would show that the services sector in the US is going from contraction to expansion territory and may lift the market sentiment somewhat.

How Much Worse Can It Get?

Last week, the S&P500 filled the Fair Value Gap at 5550 and sunk as much as 7%, which clearly was a bearish shift in the index. The trend line (in red) starting on October 2023 was previously held as support but was broken on Friday, indicating more signs of weakness.

Another sign of the severity of this move is the fact the S&P500 now trades below its 50 and 100-day simple moving averages, something not seen since September 2023. Looking ahead, it feels likely we are due for a test of the 200-day simple moving average situated around the 5000 level, which could act as a nice support area. However, it may not be as simple to target “all-time highs” as it has been in recent times, as the previous trend line could act as a resistance area to drag the index below 5000 and confirm the bearish trend. Weaker data would need to continue to flood in for this to happen, and that feels possible in the current climate.