Was Monday’s selloff indicative of the big stock market correction that Wall Street has been calling for? Analysts are watching a key level for clues.
The S&P 500 had its worst day in months Monday, tumbling 1.7%. Investors are also growing uncertain as the Federal Reserve’s meeting nears and negotiations over the Congressional budget and debt ceiling continue.
Friday, the S&P 500 fell below its 50-day moving average, a technical indicator that shows investors are losing confidence in the market outlook. The S&P 500 is 3.9% below its all-time high as of Monday’s close, at its lowest level since mid-June.
But on Monday, the S&P flashed another troublesome signal. The index briefly fell below its 100-day moving average of 4,320.
Now, the question is whether stocks will bounce back quickly or suffer a correction, defined as a 10% drop from a recent high. Frank Cappelleri, chief market technician at Instinet, is watching the 100-day moving average. As the market has fallen below these key levels, “You haven’t had the demand to buy [the] volatility,” he said.
If the S&P 500 falls significantly below the 4230 level with a majority of the stocks on the index in the red, watch out for a correction. That would indicate that market participants still see large risks that aren’t reflected in stock prices.
“Is it going to be a falling knife at that level? 1-2% down moves?” Cappelleri said. “[The] chances of an elongated volatility environment are higher.”
On the other hand, the S&P 500 could be in for a quick pullback if it sees a move higher, a tiny move lower, or a drop where the majority of stocks on the index are rising. Any of those scenarios would signal optimism.
“[The 4,320 level] can encourage some dip buying because the market has been so consistent this year,” said Cappelleri.
Other analysts are watching, too. “We are placing a lot of weight on today’s price action,” wrote founder of Fairlead Strategies Katie Stockton, on Monday.
Some good news for investors: The index closed Monday above that key level.