The U.S. stock market has sold off in the past month due to the worsening trade war and the deterioration of global economic data. On Thursday evening, the U.S. trade war escalated even further when President Trump announced that he would start imposing hefty tariffs on all goods imported from Mexico until illegal immigration across the southern border stops. The announcement caused U.S. stocks to sink on Friday, sending the S&P 500 down 36.80 points or 1.32%, the Dow down 354.84 points or 1.41%, and the Nasdaq Composite down 114.57 or 1.51%. This week’s market rout caused the major U.S. stock indices to slice below key technical levels, which means that even more pain is likely ahead.
The S&P 500 broke below its key support level at 2,800, which is not an encouraging sign. The S&P 500 has bumped its head or bounced off of this levels quite a few times since early-2018. This breakdown means that further weakness is likely ahead, unless the index negates the bearish signal by closing back above 2,800.
The Dow Jones Industrial Average broke below its 25,250 support level that it has bounced off of in recent months:
The tech-oriented Nasdaq Composite Index broke below its 7,600 support level that has come into play several times in the past year:
The Russell 2000 Small Cap Index closed below its 1,500 support level:
After the U.S. stock market’s 300% gain in the past decade (which I’ve been warning is an unsustainable bubble), it is wise to be aware of the risk of a sharp unwind:
The S&P 500 rose much faster than earnings during the bull market of the past decade and is now at 1929-like valuations, which means that a painful correction is inevitable:
The 10-year/2-year Treasury spread is another indicator that is currently warning that higher volatility is likely ahead. When this spread is inverted (in this case, literally flipped on the chart), it leads the VIX Volatility Index by approximately three years. If this historic relationship holds true, we should prepare for much higher volatility over the next few years. A volatility surge of the magnitude suggested by the 10-year/2-year Treasury spread would likely be the result of a recession and a bursting of the asset bubble created by the Fed in the past decade.
Now that the major U.S. stock indices have broken below their key technical levels, they are in a confirmed downtrend. I am concerned that another steep market sell-off similar to the one in late-2018 may be ahead unless the indices are able to negate the bearish signals by climbing back above their key levels discussed in this piece.