The S&P 500 Correction May Have Only Just Begun
Posted in The S&P 500 Index (SPX) on June 27th, 2013 by admin – Be the first to commentBy Jim Donnelly, Olson Global Markets
A more upbeat outlook on economic conditions was apparently the reason why Fed Chairman Ben Bernanke outlined a “roadmap†for tapering back on quantitative easing over the next year or so.  This more hawkish outline of reduced stimulus, however, triggered a selloff in the bond market (which resulted in a steeper yield curve), a dive in commodity prices, and a sharp move lower in major stock indices including the S&P 500 index (SPX).
From a technical perspective, last week’s stock, bond, and commodity weakness may have sparked the beginning of deeper corrections in each highlighted by an increase in general market volatility.
In the case of the S&P 500 index (SPX), the initial “risk†is for a possible move down to a test of key trend line support at the 1,515 level, or a 4.86% drop from Friday’s 1,592 close. That would represent a 10.2% correction from the 1,687 high set on May 22nd. The problem is, however, that in the absence of any sort of oversold condition, a break below 1,515 would suggest that a further decline down to a test of key trend line support at 1,445 could emerge. A test of that level would represent a total decline of 242 points from the May 22 high, or a 14.35% drop.
Also weighing on the U.S. equity markets are growing concerns over the banking system in China and its potential effects on manufacturing, commodity demand and the implications on commodity oriented economies such as Australia, Canada, Brazil, Russia and Indonesia. Continued turmoil in Syria with the potential to spread to other the Middle Eastern counties is also a troubling factor.
That said, bright spots include continued growth in domestic GDP (led by an upswing in the housing sector), an improving employment picture and a rise in auto sales. Lower commodity prices are also a plus for consumers and for companies that try to contain input costs. All of those pluses, however, may lead to another market issue. While, it is clear that the threat of inflation is not a problem at the moment, some observers may raise a series of warning flags in coming weeks over the threat of deflation instead.