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August stock slump could trigger further losses

CMC Markets

We've heard an awful lot of chatter in recent days about risks to the current stock market rally due to a combination of rising oil prices due to unrest in Syria, rising yields as a result of Fed tapering concerns and the potential for further euro centric shocks after the German elections are safely navigated. We've also had to contend with a few column inches about the Hindenburg Omen and the risks of a stock market crash, but the reality is with the current uncertain mood prevailing in equity markets why would any investor want to buy the current dips when the level of uncertainty remains so high. There is another factor that should give investors pause for thought with respect to the current US equity market rally. Let's look at this chart from 2007 where the S&P500 is trading well away from its 200 week MA by nearly 300 points. Also note the slightly higher peak prior to the steep sell off at the end of 2007 as the price starts to converge back towards its long term trend moving average, which it has traded well above for nearly three years. Let's now take this picture forward to this year and the current performance of the S&P500 bearing in mind of course that while the candle stick charts may look different the overall shape is similar. This chart is even more over extended than 2007 with the price trading around 400 points away from its 200 week MA. Note also the slightly higher peak just after the initial peak on this chart which looks remarkably similar to what happened in 2007. What is intriguing about these two charts is how similar they are in terms of look and feel and the price distance from the long term 200 week average does suggest we are long overdue some form of correction. Quite simply for the price to be trading nearly 25% away from its long term average is not sustainable therefore we need to see a price adjustment to that disparity. We also have the added as yet unconfirmed indicators that the monthly candlestick charts for both the Dow Jones and the S&P500 could be set to record long term bearish reversal candles. The break below the 1,675 level earlier this month could well have been the catalyst for some unwinding in risk appetite especially given that US markets are currently 17% higher on the year, and as such we could well see a move towards the 1,550 trend line support from the 2011 lows, especially if the current bout of uncertainty continues well into September. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.