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The S&P 500 could see an additional 10% sell-off if it breaks below a key support level.Katie Stockton of Fairlead Strategies highlighted 4,546 as a key level to watch for the S&P 500.Below that, “downside risk would increase to next major support near 4,200,” Stockton said.Sign up here for our daily newsletter, 10 Things Before the Opening Bell.
Stockton highlighted 4,546 as crucial support that the S&P 500 needs to hold in order to prevent further downside. A decisive, consecutive daily close below that level would increase the chance of downside risk to its next major support level of 4,200.
“This would dictate risk management via reduced [equity] exposure and top-down hedges,” Stockton said in a Tuesday note. The S&P 500 fell nearly 2% to 4,582 in Tuesday trades. The S&P 500 managed to find support around the 4,550 level during drawdowns in early- and mid-December.
The downside pressure for stocks has been led by the technology sector amid a hawkish pivot from the Federal Reserve, with several interest rate hikes appearing likely this year.
The Nasdaq 100 index is fast approaching its 200-day moving average and is down 8% from its record high. On Tuesday, the tech-heavy Nasdaq fell 2%, well below its key support level of around 15,575, according to Stockton. Consecutive daily closes below that level would increase downside risk to “next major support near 14,400 with a ~6-8 week time horizon,” Stockton said.
A decline to that level represents additional downside potential of 8% from Friday’s close. On Tuesday, the Nasdaq 100 Index hit a low of 15,292, which is well below Stockton’s support level.
“Short-term momentum has weakened and the FAANG+M stocks have failed to react to short-term oversold readings in another setback,” Stockton said.
If the S&P 500 reaches Stockton’s downside target of 4,200, that would represent a sell-off of 13% from its record high reached on January 4.
While that may feel like a big drop for some investors, it’s actually pretty typical. The S&P 500 only experienced a drawdown of 5% over the course 2021 before finishing the year up 27%. But since 1980, it experienced an average intra-year sell-off of 14%, according to JPMorgan.
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