Monday’s Shock Could Haunt Markets for Weeks, NDR Analysts Say After the S&P 500’s sharpest drop in nearly two years on Monday, a rebound on Tuesday followed by a shaky Wednesday has left investors questioning the next steps. According to Ed Clissold, chief U.S. strategist, and Thanh Nguyen, senior quantitative analyst at Ned Davis Research, a retest of Monday’s lows is probable, but the market could regain strength in the coming weeks if a recession is avoided. “The effects of Monday’s shock could linger for several weeks. However, current fundamentals don’t support a major bear market,” they wrote in a note on Wednesday. The analysts pointed to a dramatic rise in the Cboe Volatility Index (VIX), often called Wall Street’s “fear gauge,” which more than doubled in just three days—a rare event that has occurred only four times before. Historically, such spikes in volatility have led to initial market drops, followed by rebounds and subsequent retests of the lows. Monday’s 3% decline left the market oversold, setting the stage for a four-step recovery process: oversold, rally, retest, and breadth thrusts. While the market began to bounce back on Tuesday, gains were shaky by Wednesday afternoon. Clissold and Nguyen stressed that the retest phase could be critical, with the key to recovery being that fewer stocks hit new lows than during the initial selloff. Despite the volatility, they believe that as long as underlying fundamentals remain solid, the stock market is likely to resume its uptrend after navigating this four-step recovery process.

U.S. stocks rebounded on Tuesday after fears of a weakening economy triggered a global selloff, leading to Wall Street’s worst day since 2022. Despite the rebound, Barry Bannister, chief equity strategist at Stifel, warns it is too early to jump back into the U.S. stock market. He maintains his prediction that the S&P 500 (SPX) will drop to 5,000 by October, a 12% decline from its July peak, due to a significantly slowing economy and persistent inflation. “Our view remains a correction to 5,000 on the S&P 500 by October,” Bannister and his team wrote in a Monday note. “While we foresee a low-double-digit correction, there is also a risk of a bear market if the slowdown turns into a recession, which would be a surprise to investors and the Federal Reserve.” A market correction typically occurs when a stock index falls at least 10% from a recent high. This can worsen into a bear market, marked by a drop of 20% or more. The S&P 500 last entered correction territory on October 27, 2023, and the recent selloff has brought it close to another correction. It is currently down 7.5% from its high of 5,667 set on July 16, according to Dow Jones Market Data. Earlier this year, Bannister predicted a summer selloff and has repeatedly forecasted a market correction by October. His stance makes him one of Wall Street’s few remaining bears, as many other strategists have raised their year-end targets for the S&P 500, expecting multiple interest-rate cuts by the Fed. Bannister and his team advise investors to remain defensive, favoring “defensive-value” sectors such as healthcare, consumer staples, and utilities. These sectors typically perform well if inflation remains high and GDP growth slows sharply, offering a hedge against a potential recession. On Tuesday, the S&P 500 and Nasdaq Composite (COMP) each rebounded over 1%, while the Dow Jones Industrial Average (DJIA) advanced 0.8%, according to FactSet data.

U.S. stock index futures are up early Tuesday following a significant decline on Monday that caused the S&P 500 to drop by 3%, marking its worst single-day performance in nearly two years. Over the past three sessions, the S&P 500 lost 6%, the Nasdaq Composite fell 8%, and the Russell 2000 plummeted 10%. These declines are driven by fears of a U.S. recession and the Bank of Japan’s interest rate hike, which impacted the yen carry trade. The pressing question now is whether the worst is over for the market. Thomas Salopek, head of cross-asset strategy at JPMorgan, believes the answer is no. He explains that the necessary conditions for a market bottom are not yet present. Salopek identifies the pullback as “legitimate,” supported by widening credit spreads, a steepening Treasury yield curve, and the outperformance of utilities over the broader market. Factors like economic slowdowns or disinflation, which negatively affect other sectors, benefit utilities and defensive sectors that thrive on lower interest rates. “The growth outperformance of the second quarter suggested an economic slowdown while the third-quarter defensive leadership suggests growth risk,” says Salopek. Salopek also questions the optimistic view of labor market data, which suggests that the rise in the unemployment rate is due to increased labor supply. “If that were the case, we would expect unemployment to stabilize, not continue to rise as it has,” he notes, adding that Hurricane Beryl affected the latest figures. With the next jobs report a month away, investors need to focus on technical and risk-based signals, which are not indicating a market bottom, according to Salopek. For instance, stocks rarely bottom when the VIX (the market’s fear gauge) is at its highs, although the VIX has dropped sharply in early Tuesday trading. Additionally, the 20-day moving average’s slope does not provide reassurance, and crossing above it is “a minimum starting point.” He also notes that the put/call ratio typically peaks at market lows. The percentage of Nasdaq stocks above their 100-day moving average is 34%, but Salopek would prefer this to drop to 20% before considering it closely. Similarly, the percentage of stocks at four-week lows is far from the 60% seen in previous corrections. He also monitors the American Association of Individual Investors sentiment survey, which sent a strong signal in fall 2022 when sentiment was worse than during the COVID crisis. “Historically, a confluence of these bottoming signals during market corrections helps pinpoint the best time to re-enter,” Salopek says. For now, he recommends staying underweight in stocks and waiting for conditions to worsen enough to signal capitulation.

Dow, S&P 500, and Nasdaq-100 Futures Plunge Sunday Night U.S. stock-market futures fell late Sunday following a turbulent week on Wall Street, during which the Nasdaq entered correction territory. As of 11 p.m. Eastern, Dow Jones Industrial Average futures dropped over 250 points, or 0.7%. S&P 500 futures decreased by 1.4%, and Nasdaq-100 futures fell 2.4%. All showed slight improvements from their session lows late Sunday. Crude oil futures rose slightly amid concerns over escalating hostilities in the Middle East. Cryptocurrencies also fell, with Bitcoin dropping 8% to below $55,000 after reaching over $65,000 on Friday. Ether dropped more than 15%. Japan’s Nikkei 225 plunged 5%, continuing the previous week’s trend, as global markets reacted to recent U.S. economic data and Wall Street’s losses. U.S. stocks fell on Friday after a weaker-than-expected jobs report raised concerns about economic growth. This followed Fed signals on Wednesday indicating potential interest rate cuts in September. However, investors worry these cuts might come too late to prevent a recession. Last week, all three major indexes experienced significant losses. The S&P 500 had its worst week since April, falling 2.1%. The Dow also dropped 2.1%, and the Nasdaq saw a 3.4% decline, ending 10% below its July 10 record close, placing it in correction territory. Stephen Innes, managing partner at SPI Asset Management, noted, “Market participants scrambled for hedges amidst growing panic over interest rates and a looming recession. The spike in volatility underscores how jittery markets have become.” He added, “The real question is whether the typical market reflex to sell volatility or buy the dip can overcome the anxiety from this sudden recession scare.” Investors might brace for further declines in tech stocks on Monday after Warren Buffett’s Berkshire Hathaway revealed it reduced its Apple stake by nearly 50% last quarter. Tech stocks have struggled recently, highlighted by Intel, whose stock plunged 26% on Friday following disappointing earnings.