The US stock market is currently in the midst of what appears to be a significant correction, marking a sharp turn following a recent rally.
This correction has sent ripples through the financial landscape, wiping out more than 3% from the benchmark market index, the S&P 500, pushing it to a 5-month low.
Notably, the SPDR S&P 500 Trust ETF (SPY), which closely mirrors the S&P 500’s performance, has also suffered losses. Market analyst and trader Jake Wujastyk describes it as being ‘destroyed’ in the wake of a bearish chart pattern breakdown.
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“SPY continues to get destroyed after the bear flag breakdown last week,” said Wujastyk in an October 26 post.
What is going on with the US stock market?
The ongoing rout in US stocks can be attributed to several major factors, primarily the worsening macroeconomic landscape.
The yield on the 10-year Treasury note briefly crossed the record 5% level earlier in the week, currently sitting at 4.86%. Rising yields are bad business for stock investors because higher payouts on risk-free government debt reduce the appeal of risk assets such as equities. Additionally, they also reduce the discounted value of future earnings that support high prices for tech and other fast-growing companies.
In the meantime, geopolitical tensions in the Middle East persist, pushing oil prices higher.
Lastly, it was an important week for the Big Tech companies, with Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), and Meta Platforms (NASDAQ: META) all reporting their most recent quarterly earnings.
These companies, which accounted for the bulk of the S&P 500’s rally in 2023, fell notably after their reports, even though some of them posted positive profits and sales.
Alphabet, on the other hand, reported disappointing cloud revenue in Q3 2023, leading to a substantial sell-off and wiping almost $200 billion of its market cap.
What’s next for the stock market?
The latest stock market sell-off pushed the S&P 500 index below a crucial psychological and technical threshold of 4,200. This is the first time it has breached this level since May, and that could point to a longer-term bear run.
If the selling persists and the S&P 500 stays below the 4,200 mark, there are a few other levels that could lure some investors to buy the dip, according to analysts.
One of these price points investors and analysts will be watching is the index’s 200-day moving average (DMA) at around 4,240. The S&P 500 stayed above this level since March, before falling below it last week.
If it fails to reclaim it soon, some prognosticators see it as an indicator of a longer downtrend that could hurt the wider market in the coming weeks.
“Bad things happen beneath the 200-day moving average because it means the trend in the stock market has changed. This is a barometer of the health of the market.”
– ay Woods, chief global strategist at Freedom Capital Markets, said.
Traders regularly monitor the 200 DMA to evaluate whether the longer-term trend is up or down. Historically, rallies that failed to hold above this level often lost steam.
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