Traders brace for S&P 500 freefall as chart supports Crumble

(Bloomberg) — The fallout from the U.K.’s proposed tax cuts is trickling into the U.S. stock market.

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The S&P 500 fell as much as 1.9% on Friday, bringing its loss for the past week to 4.5%. The index has already closed below the closely watched 3800 level this week, leaving the June bear market bottom of 3666 as the next support line on the technical charts.

The UK government unveiled a sweeping tax cut plan that sent the pound and sovereign bonds crashing as investors worried about the stimulative effect of rampant inflation. This worsened the already sour mood for risk assets around the world. The S&P 500 was down 1.7% as of 10:09 a.m. in New York, and traders watching the charts for signs of where the decline may taper are bracing for the worst.

“The technicals fell out of bed,” Art Hogan, chief market strategist at B. Riley, said in a phone call. “The loss of 3,800 now brings the June lows into view, so people are waiting for that to happen.”

The S&P 500 fell for a fourth straight day and is on track for its fourth weekly decline in five. The sell-off was unrelenting across sectors: the gauge had more than 400 members close lower in each of the last three days before Friday.

Its breakout after the August highs solidifies the downtrend channel in force since the peak of the bull market in early January, according to Gina Martin Adams of Bloomberg Intelligence. “A break below the 3,900 support leaves little room for the index to catch on its way to testing the June lows,” she wrote in a note.

The Federal Reserve made it crystal clear this week that it will continue to raise interest rates sharply until officials see signs that price pressures are easing. This process will not be “painless” for the labor and housing markets, warned Fed Chairman Jerome Powell.

Wednesday’s rate hike came with forecasts that the central bank has another 1.25 percentage points of tightening in store for investors this year, a much more aggressive pace than investors had expected.

Despite the defeat, the stock is still far from an obvious bargain. At the bottom in June, the S&P 500 was trading at 18 times earnings, many times the lowest seen in all of the previous 11 bear cycles, data compiled by Bloomberg showed. In other words, if stocks recover from here, this bear market bottom will be the most expensive since the 1950s.

While investors were previously positioned as if the economy was headed for a soft landing, that’s no longer the case, according to Anastasia Amoroso, chief investment strategist at iCapital.

“What markets really need to do is price in a recession, because that seems to be the price of weakness in the labor market at the end of the day,” she said on Bloomberg TV this week.

The market has been trading in the range of 3,700-3,800 to 4,300 for some time, she said.

“We may need to see a break below the bottom of this trading range to find really cheap value in the stock,” Amoroso said. “We’re just not there yet, so the trade for now is basically to be defensive and get paid while you wait for that bottom in the market.”

As for the bottom in June, many see an ominous signal in the number.

“Anything lower than where it is now feels diabolical,” Kim Forrest, founder and chief investment officer at Bokeh Capital Partners, said in an interview.

(Updates prices everywhere.)

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