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The S&P 500 has fallen 10% since its peak in late January last year, a downward fact that has become even more apparent since the start of the U.S.- and Israeli-led military campaign against Iran. Financial market risk assets are under pressure due to sharp increases in market oil and natural gas prices and the resulting new expectations about the outlook for inflation and monetary policy.
However, as with all past selling waves in financial markets, this correction will end, but several conditions must be met before considering buying again. First, there are mandatory basic conditions:
• Reopen the Strait of Hormuz
• Restore normal operations of the oil and gas industry in the Persian Gulf region, thereby restoring energy supplies to Asia
• WTI oil prices are back below $80, inflation expectations are back under control, and most importantly, forward-looking monetary policy will not tighten.
Technically, the first signal to watch before calmly returning to buying is crude oil prices
US returns are below the $80 level.
Technical analysis of the S&P 500 can give us a clear picture of how previous selling waves ended. Several technical conditions must be met:
• Back near major support levels
• Momentum indicator enters oversold condition (RSI and LMACD used here)
• Observe oversold conditions from a quantitative perspective, such as the number of S&P 500 stocks trading above their 50-day moving average
• From the perspective of institutional positioning, the liquidity ratio of fund managers has returned to a level above 5/6%.
The chart below, taken from Bank of America’s monthly (15th of each month) global fund manager survey, shows the evolution of the average liquidity ratios of institutional managers. Historically, the 5/6% area represents the area where bear market bottoms form. Conversely, when below 4%, the market may be near a mid-term top.
The chart below shows the percentage of S&P 500 stocks trading above their 50-day moving average. This is a way of quantifying the market, which is usually near a low when the percentage of stocks above that average falls below 20%.
For the S&P 500, the most obvious technical support for return buying is between 6,000 and 6,200, which is horizontal support corresponding to the previous all-time high.
The chart below shows the daily Japanese candlesticks for the Dow Jones Index.
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