Technicals Support the Market

U.S.-China trade tensions have ratcheted up again following President Trump’s decision to level tariffs on the remaining $300 billion of U.S. imports from China. Combine that with China’s decision to let its currency (the yuan) weaken past the 7 per dollar level, and investors may be more concerned than ever that global tensions could drag down the economy and stocks.

From July 26 through August 5’s close, the S&P 500 Index lost 6%. Even though stocks have rebounded the past few days, we remain several percentage points off the highs. While heightened volatility may be here to stay, technical analysis suggests the market is unlikely to revisit the December lows.

As shown in the LPL Chart of the Day, S&P 500 Index Has Strong Technical Support, the June lows near 2,740 have been a key pivot point for the index going back to February 2019. In addition, the 5-day put/call ratio surged to its highest level since December, suggesting investor demand for protection was high, a bullish indicator for stocks in our view.

“Fear can be an important ingredient in forming a market bottom,” said LPL Senior Market Strategist Ryan Detrick. “We think the technical support and fear already shown by the market makes a break of the June lows unlikely, but if it occurred, it would likely represent an opportunity for suitable investors.”

“Fear can be an important ingredient in forming a market bottom,” said LPL Senior Market Strategist Ryan Detrick. “We think the technical support and fear already shown by the market makes a break of the June lows unlikely, but if it occurred, it would likely represent an opportunity for suitable investors.”

Late summer weakness shouldn’t come as a surprise, as we discussed earlier this week in our Weekly Market Commentary. We expect the S&P 500 to ultimately rally back toward our S&P 500 year-end fair value estimate of 3,000 given a more accommodative Federal Reserve and a generally favorable macroeconomic environment.

 IMPORTANT DISCLOSURES

Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.

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