S&P 500: Following the Footsteps of the Dot-Com Crash
Anticipating Further Decline Amidst Weak Market Breadth
Two months ago, this newsletter drew a comparison between the current state of the market and the dot-com crash of 2000-2003. As the current day market stands at an inflection point, it is worth revisiting this thought with some added updates. To provide a high-level summary of the prior two observations. (For new subscribers, I encourage a quick read of the Jan 22 & Feb 26 notes, links below)
The first observation identified a chart area characterized by two consecutive false breakouts. These breakouts were defined by the short-term moving average (20 day, red) crossing above the medium (50 day, black) on the S&P 500 without sustained follow through. [January 22 Article]
In the following month, this newsletter noted another striking similarity. Both during the dot-com era and the present day, the second false breakout induced a sense of greed among market participants, just before the commencement of the final leg of the decline [February 26 Article]
Since drawing the initial comparison, the present-day market has closely followed the pattern of the two false breakouts, causing market participants to progress from a state of greed at the peak of the second false breakout to a position of fear as the market declined. The commonly referenced CNN Fear & Greed index shows this change in sentiment.
Market Comparison: Revisiting the Dot-Com Crash of 2000-2003
The S&P 500 charts that are presented below illustrate the above points with red annotations. The blue line at the bottom of the charts represent a sentiment reading. A high reading indicates a market characterized by greed, while a low reading reflects fear.
To provide further context, the charts now include a volume profile offering perspective on where market participants have traded the index. The peak of this volume profile is the Point of Control (POC), which represents the area where the highest volume of trades occurred over a specified period. This week, I want to draw attention to the observation that just before the final decline accelerated, the S&P 500 failed to meaningfully surpass the established Point of Control. This is yet another remarkable similarity with the present market.
Although each decline was triggered by vastly different circumstances, it seems that the market has arrived at a comparable inflection point today. Below is the current day S&P 500 market rhyming with the dot-com era. In the coming weeks if the S&P 500 consistently trades below the point of control (3950) it will be following in the footsteps of the dot-com crash.
Market Breadth Remains Weak
Last week, the S&P 500's short (20, red) and medium (50, black) term moving averages acted as moderate resistance, and I anticipate that these moving averages will continue to serve as resistance for counter-trend rallies as the down cycle progresses.
However, what should be concerning to remaining participants is the deterioration and weakness in market breadth. One way to assess market health is through the measure of Net New Highs, which considers the number of stocks that are reaching new highs, minus the number that are reaching new lows. Despite the brief market advance from March 13 through intraday March 22, the Net New Highs reading remained negative, and has since worsened to end the week.
Key Levels Ahead
The S&P 500's 3800 level has become a familiar point for market participants since it marked the lows of December 2022 and the start of the new year. However, if prices drop below this level, it will lead to negative performance for many market participants and funds. This is likely to create emotions that accelerate and fuel a further decline towards the next level of significance, 3500 - 3575, representing the lows of this bear market that were established in October of last year.
As market conditions continue to deteriorate and media headlines grow increasingly frantic— this environment may provide opportunities to 'buy fear.' This could occur if the S&P 500 establishes support as it approaches the October lows (3500 -3575).
While my attention has primarily been focused on the potential for lower prices in the market, I acknowledge the possibility of a significant trend reversal. If the S&P 500 were to break above the 4200 level, it would suggest that the bear market lows have already been established and a true reversal is taking place. However, based on my analysis, this scenario remains unlikely
Market Outlook
As we move into another week, my focus remains on the simple analysis that we have been monitoring closely for the S&P 500. These include the price staying below the 3950 point of control and the short and medium-term moving averages acting as resistance during counter-trend rallies. If the current day market participants are to rhyme with the buying and selling patterns of those during the dot-com era, I will be anticipating the rate of decline to accelerate as price trades below 3950, and more so below 3800.
My market outlook continues to remain bearish with a decline target of 3000 - 3200 on the S&P 500.
Timely Newsletter Insights
This newsletter has contained timely insights about the stock market.
On August 31, it was noted that the market resembled the environment and chart of 1969, and warned of a bearish crossover. This happened the following week.
On September 18, the article discussed the technical deterioration in the S&P 500 and predicted that the June lows would be revisited, which occurred the following week.
On September 25, the article continued the comparison to 1969 and identified a potential double bottom as an area to initiate a relief rally. This rally started on October 13 and reached its target area on October 28.
From October 30, 2022 through March 2023, the articles discussed the end of the relief rally. *At the peak of the rally the S&P 500 had extended moderately above the target of 3900-4000. The market has remained in this area through February/March 2023. Accuracy of this call remains to be determined.
Disclaimer: The information in this article is for informational purposes only and should not be considered financial advice or a recommendation for any investment. I am not a financial advisor, and the content is not intended to serve as financial advice. It is solely intended to ignite thought and discussion.
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