S&P 500: The Correction Approaches by Victor Dergunov

8 months ago
4 Min Read
722 Words


  • The S&P 500 continues to climb higher and higher.
  • Technically, the SPX is now very overheated, and there are some parallels to the S&P 500 of early 2018, right before a major correction struck.
  • In addition, the economic backdrop is not incredibly constructive, corporate earnings are stagnating, and future profit growth appears too optimistic.
  • The Fed's monetary stance may need to change to fuel stock prices higher, but the Fed is not likely to lower rates unless a significant market disruption occurs.
  • At least a 5-10% correction appears likely soon before the next leg higher can begin to materialize.
  • This idea was discussed in more depth with members of my private investing community, Albright Investment Group . Get started today »

Source: Axios.com

S&P 500: The Correction Approaches

The S&P 500/SPX (SP500) continues to surge to new all-time highs in 2020. Despite the numerous headwinds, this bull market just won’t quit, as the S&P 500 relentlessly climbs the proverbial wall of worry. Nevertheless, certain indicators are implying that the SPX and stocks in general are overheated right now, and there is likely very limited short-term upside before a correction knocks stocks down in Q1 2020.

Additionally, the S&P 500 appears to be approaching similar technically overbought market conditions that we witnessed in early 2018, before a correction of about 10% materialized. Furthermore, there are numerous fundamental factors that suggest a repricing of stocks is preferable, and likely before the next leg of this bull market can emerge.

Technical View

If we look at a 1-year chart, we can see that stocks have essentially turned vertical. The SPX is up by around 15% since early October alone.

Source: StockCharts.com

If we go back to the lows of late 2018, the SPX has appreciated by nearly 40%, and the S&P 500 is up by nearly 50% since 2017 began.

The RSI recently touched up close to the 85 level, a phenomenon not seen since the correction of early 2018, the last time that stocks turned vertical. In fact, if we look back on the trend then and the recent advance, we can see quite a few similarities. Not only is the chart turning vertical, but the RSI and other technical indicators are sounding off alarm bells as well.

For instance, we can see that the divergence between the 50-day moving average MA and the 200-day MA is getting quite wide. Right now, it is about 170 points, the widest the gap has been since around early 2018. Also, on a percentage basis, we see that prior to the early 2018 stock market selloff, the SPX had appreciated by roughly 30% over the prior year, much like the SPX’s past 52-week returns. Furthermore, early October to January top returns were 15% in 2017/18, much like the returns we’ve seen from the fall of 2019 until now.

There are quite a few parallels between now and then, technical and fundamental that suggest markets may be gearing up for another Q1 correction, much like what transpired in early 2018.

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