Warning: What Last Week’s Stock Fluctuations Mean

After a strong 14.5% rise in the first half of the year, S&P 500 futures indicate a challenging start for the second half of 2024, according to Michael Kramer, founder of Mott Capital Management.

Kramer notes that the cautious start to July follows a concerning end to June, making stocks vulnerable to a pullback. Last Friday, the S&P 500 fell 0.4% after hitting a record intraday high, resulting in a bearish engulfing candle—a negative technical signal.

A bearish engulfing candle occurs when a trading session’s range surpasses the previous session’s range but closes lower. This was the second such candle in a week, forming a “2b top reversal pattern.” This pattern suggests that an index or stock attempts a new high, fails to maintain it, and then closes below the previous high.

Kramer highlights that last week’s high exceeded the previous week’s but ended lower over the five-session period. Since January 2020, this pattern has appeared only eight times, and in seven instances, the S&P 500 fell the following week. The only exception was in January 2021.

For the ‘2b top’ pattern to be invalidated, the S&P 500 must close above 5,487.02 this week, according to Kramer.

Other indicators also support Kramer’s caution. The CBOE 1-month implied correlation index, an options-based tool measuring market breadth, hit a record low of 5.59%, below the previous low of 6.78% in October 2017. Additionally, Kramer is wary of the VanEck Semiconductor ETF, which is holding at a 20-day moving average of around $255. A break below this level would signal a downward move.

Kramer also notes that high-yield credit spreads, a measure of risk in corporate borrowing, are trending higher even as stock prices rise. Similar conditions in January 2020 and fall 2021 preceded significant market pullbacks.

Addressing skepticism, Kramer acknowledges that some may find it hard to believe the S&P 500 could drop significantly. However, he argues that caution is warranted given the market’s rapid rise since October 2023, despite high overnight rates and Federal Reserve policies.

“Being cautious isn’t about being bearish. It’s about assessing the odds and managing risk,” Kramer concludes.