To The Moon

• Both the S&P 500 and Nasdaq 100 crashed by 3% on Monday.

• The fear index, VIX $Cboe Volatility Index(VIX)$ , surged 65% to 38.45 from 23.39. This current VIX level of 38.45 is the highest since 2020.

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Reasons for the Equity Market Rout

• Unwinding of yen carry trade due to yen appreciation and interest rate hikes

• Rising Middle East tensions

• Recession indicator - Sahm Rule triggered

• Weakening US labor market

• Potential US-China tech war

• Sector rotation triggered by impending rate cuts and Trump’s re-election odds

• Growth scare due to lower earnings guidance

How Low Could the S&P 500 Go?

1) Based on 2022 Correction:

• The S&P 500 experienced a maximum drawdown of 25.43% in 2022 due to recession fears, geopolitical tensions, and rising interest rates.

• If history repeats, we may see the S&P 500 fall to 4,226.

2) Based on Historical US Election Year’s Max Drawdown:

• Since 1948, the S&P 500 has had an average maximum drawdown of 13.22% in US presidential election years.

• The S&P 500 has corrected by 8.49% to 5,186 from its 2024 high of 5,667. If history repeats, we may see the S&P 500 retreat to 4,917, representing a further drop of 5% from the current level.

3) Based on Technical Analysis:

• Fibonacci extension shows that if the support level of 5,115 (61.8% Fibonacci level) for the S&P 500 is broken, the next major support is 4,805 (50% Fibonacci level).

• Based on Fibonacci Extension, my strategy is to ‘Nibble at 5,115, Bite at 4,805, Gorge at 4,495’.

• Note that 4,495 represents a major support level and appears attractive based on Fibonacci analysis, but it does not mean that S&P 500 will surely drop to the said price level.

• I will revise the Fibonacci levels with new price developments.

   

How Long Might the Correction Last?

1) Based on Presidential Election Seasonality:

• August is generally an up month, while September and October are typically down months during US presidential years.

• We may see some rebound in August, followed by a resumption of the downtrend in September and October. The bottom could occur in September or October based on seasonality.

 2) Based on Drastic VIX Movement:

• Normally, VIX futures with longer-maturity trade higher than shorter-maturity VIX futures.

• However, currently VIX futures with longer maturities are trading lower than those with shorter maturities, indicating that the S&P 500 is pricing in extreme near-term fear.

• Typically, when the VIX spread (long-term minus short-term) is negative, it suggests that the S&P 500 is close to bottoming out.

   

Conclusion

• The US equity market movement is anyone’s guess now. Investors should pace their entry and not to shout ‘buy’ at every possible bottom.

• In summary, I am short-term bearish but long-term bullish. My preferred strategy is ‘Nibble at 5,115, Bite at 4,805, Gorge at 4,495’.

• The market is volatile and changing rapidly. I am prepared to revise my outlook based on major fundamental developments.