S&P 500 Pullback: Why This Week’s Dip May Not Be the Final Low

The S&P 500 experienced a sharp pullback on Tuesday, coming close to its 200-day moving average (200DMA). While this level served as a short-term support, market analysts suggest that this is unlikely to be the final low of the current downturn.

Market Outlook: More Downside Ahead?

According to Jonathan Krinsky, BTIG’s Chief Market Technician, the recent drop was expected and should be viewed as part of a broader pullback rather than a final bottom. He emphasised that market declines like these are a natural feature of tactical lows, not an anomaly.

Historically, markets often witness intraday declines even after a bottom is established. For example, on August 5th, 6th, and 7th, the market recorded daily drops of 1.37% or more, despite having already formed a low on August 5th. This pattern, Krinsky notes, reinforces the idea that further downside could be ahead before a sustainable recovery.

Global Markets: Europe and Hong Kong Lead the Way

Interestingly, European markets have outperformed U.S. stocks this year, with gains ranging from 7% to 16%, depending on the index. In contrast, the S&P 500 is down 0.7% year-to-date (YTD). Meanwhile, Hong Kong’s Hang Seng Index has surged over 21% since the start of the year.

Krinsky pointed out that European stocks have not outperformed the S&P 500 in a calendar year when both finished positive since 2012, marking a 13-year trend. However, he believes 2025 will continue to see global outperformance, catching many investors off guard.

Technical Signals: More Weakness Before a Final Low?

• Market Breadth Signals: On Tuesday, 17% of Russell 3000 stocks hit a 52-week low, the highest level since late 2022. Such extreme weakness often precedes a short-term bounce, but Krinsky suggests that a true market bottom may require even lower lows combined with a positive breadth divergence.
• Put/Call Ratios Remain Muted: Despite a surge in put option activity, the overall put/call ratio remains subdued due to a significant volume of call options being traded. A sharp spike in the put/call ratio could provide stronger confirmation of a final low.
• Global Market Trends: The All-World Index has broken its multi-year downtrend relative to the S&P 500, signalling strength in global markets. European and Hong Kong stocks continue to show resilience, but Japan appears more vulnerable in the current environment.

What to Expect Next?

With market volatility still in play and technical indicators suggesting further downside, investors should brace for more fluctuations before a final bottom is confirmed. Keeping an eye on market breadth, put/call ratios, and global trends will be key in assessing when a sustainable rebound might begin.

(Sources: investing.com, reuters.com)