- Double top scenario is playing out.
- S&P 500 should see 2600 or lower this quarter.
- Don’t buy-the-dip yet.
It took bad macroeconomic news, but traders got it in time. The S&P 500 had been holding below the record high level of 3,025 since mid-September, awaiting a trigger. Tuesday’s ISM Manufacturing Index, coming out in contraction territory at 47.8, the lowest reading since June 2009, was all that the technical traders need. A double top on the S&P 500, visible to all, is now looking like a real possibility.
Should the double top be confirmed, with the S&P 500 breaking the trough between the July 2019 and September 2019 peaks, we can expect at least another 200 points of downside below 2,820 on the index. That is, we should expect to see the S&P 500 trade down to 2,600 in the Q4. The equity market high for 2019 is likely behind us.
The negative chart set-up also concerns European equities. Check out the same double top (or maybe triple top) on the Euro Stoxx Index.
The backdrop is perfectly set up for a stiff correction. The central banks, notably the ECB, have fired lots of their bullets. President Trump is “inching closer” to more severe sanctions on China. Cutting off capital flows to China and using sanctions to inhibit non-American financial transactions with China (or just the threat of this) would tank equities without question. The “American consumer is strong” narrative among commentators could spread too far. Sentiment got too optimistic partly because everyone is now believing in the American consumer. Our WMA Market Sentiment Indicator captured this optimism over the past two weeks. Today’s reading showing that Sentiment is now coming off the euphoric levels of the prior two weeks.
The one challenge to our assertion would be if the technicals reverse and we see the S&P 500 close above Tuesday’s close at 2,940. In this case, the odds of seeing the S&P 500 re-test the 3,000 level would increase dramatically. At the time we write, the only trigger we see for such a stunning reversal would be a trade truce announcement next week between the U.S. and China.
We see a better entry point for select sectors once the S&P 500 returns to 2,600. We continue to recommend the Energy sector and, specifically, the solid dividend payers within Energy. See “Want Yield? Fuel Up With Energy”
Bottom Line: the weight of the evidence is against another quick buy-the-dip opportunity with the S&P 500 only 100 points off record highs. Save your cash. We expect to see a much better entry point for equities in the fourth quarter.
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