S&P 500 (SPY) Dives Below The 4000 Level

Key Insights

• S&P 500 is moving lower as traders focus on potential aggressive moves from the Fed. 
• The strong pullback in commodity markets has led to a sell-off in energy and basic materials stocks. 
• The current pullback is broad, and there are no market segments that can move against the selling wave. 

S&P 500 Remains Under Strong Pressure

S&P 500 gained additional downside momentum and moved below the 4000 level after CB Consumer Confidence report beat analyst expectations.

Good news is bad news for markets right now as healthy consumer activity increases chances for an aggressive rate hike at the next Fed meeting.

There is another catalyst that must be watched closely. In September, the Fed will ramp up its quantitative tightening program. Each month, the Fed will reduce the size of its balance sheet by $60 billion of Treasuries and $35 billion of mortgage-backed securities. Instead of selling them, the Fed will let them mature.

The reduction of Fed’s balance sheet has already begun. However, the pace of this reduction was modest. Starting from September, markets will face tighter liquidity, which may serve as an additional bearish catalyst for stocks.

S&P 500 has recently managed to get below the 4000 level and is trying to develop additional downside momentum. Interestingly, RSI remains in the moderate territory, so there is plenty of room to gain additional momentum in case the right catalysts emerge. Traders should expect significant volatility as S&P 500 moved from 4200 to 4000 in just three trading sessions.

Energy Stocks Lead The Sell-Off

Energy stocks have suffered a strong sell-off today as WTI oil is down by about 6%. Exxon Mobil, Chevron, Schlumberger and other leading energy stocks are down by 3-4% today.

Basic materials stocks are also under strong pressure amid a broad sell-off in commodity markets. For example, the leading copper producer Freeport-McMoRan is down by about 6% today.

Tech stocks are also moving lower. All leading tech names, like Apple, Microsoft, and Alphabet are losing ground today. There is nowhere to hide, as all market segments are under pressure.

However, there are some bright spots in the market. The discount retailer Big Lots is up by more than 7% after a better-than-expected earnings report. It should be noted that Big Lots stock has been under pressure for months, so the reaction to the report is a typical relief rally as the company’s performance was not as bad as expected.

Avid Technology is up by roughly 12% as the stock joined the S&P 500 SmallCap 600 index. The inclusion in an index is always a positive catalyst as it forces index funds to buy the stock.

From a big picture point of view, traders are worried that aggressive Fed will hurt economic growth. If these worries persist, stocks will remain under pressure.

For a look at all of today’s economic events, check out our economic calendar.