S&P 500 in a bear market

Derek Wee

THE S&P 500 Index (SPX) is down 23 per cent year-to-date (YTD), closing at 3,666.77 on Jun 16, 2022. Weighed down by rising inflation, rebounding global demand, supply disruptions, geopolitical tensions and slow economic growth rates, the SPX entered a bear market on Monday Jun 13, 2022. The decline on Monday placed the SPX index 22.2 per cent below its high of 4,818.62 on Jan 4, 2022.

A bear market is a decline of 20 per cent or more from recent highs. The last time the SPX was in a bear market was Mar 12, 2020, where it lasted 18 days with a maximum drop of 34 per cent from its high at one point..

On the other hand, the Nasdaq 100 index (NDX) closed at 11,127.57 on Jun 16, 2022, marking a YTD decline of 31.8 per cent and placing the index deeper into the bear market. The NDX has been in bear territory since April 26, 2022, and the last time it was trading at this level was in October 2020.

Taming inflation

Just last week, the Fed announced an interest rate increase by another 75 basis points (0.75 per cent).This increase marks the largest rate hike since 1994 and the third hike YTD. After maintaining 2 years of near zero interest rates, the past 6 months alone saw the Fed hike interest by 25 basis points (bps) in March, 50 bps in May and the most recent 75 bps in June.

This brings the benchmark funds rate (the primary credit rate) into a range of 1.5 per cent to 1.75 per cent, the highest since just before the Covid-19 pandemic began in March 2020. As the economy struggles with rising prices, the Fed has signalled that its benchmark rate will continue to rise to a target of 3.4 per cent by the end of the year, an upward revision of 1.5 per cent from their March estimate.

Looking ahead

At the close of 3,666.77 on Jun 16, the SPX price to earnings-per-share (P/E) ratio is 15.48x, lower than its past 5 years’ average P/E of 22.5x and past 10 years’ average P/E of 20.2x. However, with the current economic landscape looming, there are possible risks that company earnings will stagnate or even decline.

On a technical perspective, the SPX continues to see weakness as it entered bear market on Jun 13. Its nearest resistance level is at 3,837.25, which is the level indicating the SPX to be in bear market.

On Jun 15, after the Fed’s announcement, the SPX attempted to break above the 3,837.25 level which later weakened and closed at 3,789.99. Its 50 days exponential moving average (EMA50) has also been moving lower, cutting below the EMA200 and EMA300.

Referencing back to the most recent bear market in 2020, the Relative Strength Index 14 days (RSI14), a momentum indicator, declined to as low as 19.16 with further dips below 30 within a few weeks.

With reference to the current market, RSI14 is at 31.14, approaching oversold levels (below 30). As such, the SPX could suffer further weakness in the weeks to come with support levels at 3,235.

A break below the support level could see the SPX trade range bound between 3,225 and 3,235.

The writer is strategist at Phillip Nova