SP500 Could Crash like 2008 | Episode 69

By Jason McIntosh | Published 16 September 2022

Trade the Trend is a weekly video focusing on where the stock market is going. It’s for investors and traders looking for technical analysis of the SP500, as well as stock markets and commodities markets in general. Jason uses technical analysis of stocks and trend following techniques to help you piece together the world’s biggest puzzle.

Where is the Stock Market Heading?

00:00 Intro

00:37 SP500 reaches critical level (what next?)

01:44 The key positive from last week’s SP500 price action

03:50 This has been my preferred view (and what I think now)

05:55 The similarity to 2008 is striking (could it signal a stock market crash?)

09:00 Make sure you consider THIS

10:03 This is what I’m doing with my portfolio

Transcript (abridged)

Please note: Charts available from video

So, what we have on the screen here is the S&P 500. And it really has been a huge week in the market. It’s a whole lot going on. And it has to be said the S&P 500, right here now at the time of filming, it is delicately poised. We got off to a strong start to the week, and also late last week and early this week we did see the makings of a strong rebound, potentially a strong rally. But when that U.S. inflation number came out above expectation, we saw the market quickly reverse course, and now here we are right down here at the bottom of the key support zone around 3900. Now just so you know, I’m recording this on Friday afternoon Sydney time. So, I don’t have the benefit of what happens in the U.S. on Friday. And I’ve got to tell you this is a particularly difficult situation to analyze with the market where it is now right here at a key level.

Now, if we’re going to draw any positives from the latest price action, the price action during the week, I think that so far, you’d say that there hasn’t been much follow-through selling from this sharp move lower that we had on Tuesday. And so we had that sell-off on Tuesday but the market has been built on the momentum of that fall. And at least for now, that hasn’t happened. And that’s quite different to what we saw over here in June. So, in June, the market is selling off prior to, a couple of days before a CPI number came out, and then it continued to fall afterwards. So, what we’re seeing now is quite a bit different without getting that follow-through momentum.

So, the way I’m looking at this, I think we’ve got a situation where market sentiment is extremely bearish. But with that being the case, it still hasn’t quite broken down below the September low and it is sitting on this key support. That’s now. Maybe this has all changed by the time you view this. We don’t know what’s going to happen. Well, I don’t know what’s going to happen Friday in the U.S. So, some of these comments, they may have changed. Things may have changed. But so far, we don’t have that big downdraft that so many people are anticipating. I think this 3900 is critical to what’s going to happen next. If the market loses its footing here and it does start to fall away, we get down to around 3800, and once we get to there, if we get to there, then I think the odds of a retest of this June low and a break of that June low really start to increase significantly. I think that’ll be on the cards should we break this support and get down below 3800, then we’re looking at those more bearish scenarios and a new low.

My preferred view definitely over the last few weeks has been that the S&P may try to rally. It may try to continue this rally that we have seen off the June low. And not necessarily as part of a new bull market, but I was considering the possibility that if the market were to be able to rally, maybe it would be part of an ongoing bear market that sees prices potentially, even nearing those January highs, is one of those potential scenarios I was looking at and then that possibly being a larger topping formation, which then potentially leads to lower levels later this year sometime into the first quarter of next year. We don’t know. Just scenario-building.

And a situation like that I think would cause more damage than a quick market drop now because like an ongoing bear market rally, it just draws more people in and then falls away once more people are back involved in the market. And that’s what bear markets are notorious for. They’re notoriously difficult and they often travel a path that causes maximum damage. So, a pathway that goes higher and then comes down would be classic bear market stuff. But maybe that’s not what’s going to play out. Maybe the play is for a larger fall to develop now. My resistance to that view, my resistance to the view that the S&P 500 is about to crash, is based around the extreme negativity and the outright bearishness that we’re seeing in market surveys, and in people trading options. There’s a lot of bearishness built into the market. So, that makes me hesitant to think the market is about to completely drop and fall away.

Also, I want to show you a really interesting chart that turned up during the week on my Twitter feed. So, this is a chart that compares…What the author of this chart has done, he’s comparing the S&P 500 during 2007, 2008, so that’s the GFC period, and that’s in black, and in this orangey color is the current market. And I’ve been seeing charts like this appear quite a bit over the last few weeks. And what’s interesting is that when you do this overlay, it looks like it’s a pretty close match. So, when you do that, it can then be easier to say, “This is going to be a roadmap for what happens next.” We’ve now had this rally, which the overlay predicted, so now we must be about to get this big sell-off which I think a lot of people are anticipating now. But I find this really isn’t that straightforward. I’ve been seeing people do comparison graphs and picking different periods in time and overlaying them and saying, “This will be our map forward.” I’ve seen them doing that since I got into the markets in the 1990s. People have been doing this for a long time. And I can’t remember a time where it’s really provided that tradable roadmap where you go, “I know what’s going to happen next.”

And the thing that makes this thing possible is that markets naturally have similarities to other periods, and that’s because market movement is partly fueled by emotion, and emotion then tends to play out in particular ways, and that’s why we see these sell-off and then the sharp bear market rallies, the sell-off and bear market rallies. So, you get those similarities. But while I think this 2008 scenario, it is a possibility, and the possibility is increasing with the market testing that 3900 support, I’ve been of the view that we probably should assign a lower probability to it simply because I think too many people are anticipating that’s what’s going to happen. People are anticipating an imminent meltdown. And what they anticipate is it’s often not what they get. Now let’s just jump back over the S&P 500.

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Now back to this S&P 500 chart. I think the point we need to consider here is this gets back to that last overlay we were looking at is that rarely does the market do what everyone expects to happen at the same time everyone expects it to happen. That’s why I’m resistant to this idea that we’re going to get some sort of a crash. It doesn’t mean it’s not going to happen. It’s certainly feeling pretty vulnerable at this point in time. So, that’s why I’m just not sure the market is simply going to deliver that crash on demand, but there’s no doubting, the overall technical setup remains negative. We’ve got this three-point down trend line which is a significant trend line to have when you can link up three points like that. So, we’ve got to say the primary trend is it is down at this point in time. There’s no doubting that. The moving averages, I’ve got the 50 and the 100-day moving averages. They’re both trending lower, and the price is currently below the moving averages. And so these are all reasons for continued caution.

And really, if you’ve been following these videos in recent months, that’s been the message for some time that this is a market to be cautious about. I’m mostly in cash at the moment, but as I’ve been saying through this period over the two months since the June low, I’ve been incrementally getting some exposure to the market, and that strategy has all been based around getting some sort of a position, getting a foothold on the market in the event that the market surprises most people and rallies. Now, that may not happen but it could happen. So, it’s not about being all in or all out. It’s about managing risk and getting a position in when markets are rising. But at the same time, I don’t want to be too exposed in case this actually does roll over and hit lower quickly.

If support around 3900 gives way, I’ll probably be unwinding some of my ETF exposure, which I’ve put in place during this period. And as I often say, it’s not about being right all the time. It’s about managing risk and playing those possibilities. So, let’s leave it there for this week. It’s going to be really interesting to see what the market delivers. So, as I say, tread cautiously at this time. And let’s reconvene this week and see what the price action tells us.

Please see video for more details analysis and charts

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