The stock market is being crushed once again. It is now more likely to revisit its recent bottom.
It is experiencing a decline for the fourth consecutive day on Friday. It is now down about 13% from the mid-August peak of the summer rally. One key driver: Stubbornly high inflation is prompting the Federal Reserve to raise the federal-funds rate at a rapid pace. This week, the Fed indicated that it sees a “peak” fed-funds rate of more than 4.5%, slightly higher than previously estimated. The Fed is trying to lower the rate of inflation by reducing economic demand, so the problem for the stock market is that the economy could take a hit — and so could corporate earnings.
All this has pushed the market to dangerously low levels. This week the S&P 500 dropped below a level of just over 3800 – it is now on a tick below 3700. it’s important; At just over 3800, buyers recently stepped in sometime to push the index higher. Those buyers are gone as confidence in the market outlook has faded. With the index now showing a further downward trend, “failure to hold”  “There is a major change of character for the market, with the potential for a sharp decline to June lows increasing,” wrote John Kolovos, chief technical strategist at Macro Risk Advisors, in a research report.
Speaking of that June low, the market is definitely flirting with seeing it again. The intraday low for the year is 3636, which was hit in mid-June. The likelihood that the S&P 500 moves back to that level is not only because it represents a small loss from here, but also because traders would expect at that point to buy “support” there. could. If the index breaks below that support level, the next support level is around 3500 levels. This represents about a 5% loss from here.
This is bad news, but don’t give up hope just yet. There is still a reverse scenario. Kolovos wrote that if the index can find support near lower levels, it could experience an “impulsive rally” beyond the 4100 area. That’s where a brief rally in early September ended – and the sellers stepped in. Buyers at that level would indicate a market that is moving more confidently.
In fact, there could be some positive developments to send the market back to the upside. The main development would be that the Fed doesn’t actually raise the fed-funds rate above 4.5%. Historically, the Fed often doesn’t raise rates all the way until their launch, Sevens Reports Research noted. In 2015, the Fed projected that the fed-funds rate would exceed 3% in a few years from then. By 2019, it reached around 2%. That’s because the Fed’s rate-hiking campaign drives interest rates higher, reducing borrowing and spending. Then, economic growth declines and the Fed stops raising rates.
“If the economy slows meaningfully in the coming months, history implies that the Fed will …
This will likely put a floor under economic growth forecasts. Earnings, while being hit, may not tank to catastrophic levels. Markets can look to better days when economic and profit growth can be credible.
The point is that the market is at a crossroads and the next few trading days will be crucial.
Write to Jacob Sonenshine at email@example.com