The stock market sell-off in recent days has tripped a number of warning signals that point to more pain ahead for investors.
The tech sell-off stretched into a fourth session on Tuesday, declining on a cocktail of worries while the market also flashes several red flags for investors to be wary of.
The S&P 500 crossed a key technical level that could hint at more weakness to come. The benchmark index dropped below its 50-day moving average on Tuesday — the first time it’s done so over the last 138 trading sessions.
The 50-day moving average is an important technical threshold, and the recent decline ends the S&P 500’s longest streak of trading above the 50-day moving average since 2007, Deutsche Bank said on Tuesday.
The signal could be a sign that more selling pressure is on the way, Rosenberg Research wrote.
“Looks like a test of the April low is on the table,” the research firm said. The index falling back to its low in early April implies the S&P 500 falling 27% from its current level of 6,579 on Tuesday morning. The firm said that 6,550 is the next level it is watching.
Adam Turnquist, the chief technical strategist at LPL Financial, also said stocks could retest the 6,550 mark after breaking below the key 50-day moving average.
“While history suggests this break isn’t inherently bearish, the index also fell below the lower boundary of its rising price channel yesterday. Key downside support now sits near the November lows at 6,631 and October lows at 6,550,” he wrote in a note to clients on Tuesday.
But that isn’t the only sell signal that is flashing right now.
The crossing of the closely watched technical threshold has coincided with another warning sign in stocks: investors are holding onto “very low” levels of cash, Bank of America said in a report on Tuesday.
Global fund managers surveyed by the bank had an average cash level of 3.7%. That’s a “sell-signal” in stocks, analysts wrote.
BofA Global Fund Manager Survey/BofA Global Research
“Note cash levels of 3.7% or lower has occurred 20 times since 2002, and on every occasion stocks fell and Treasurys outperformed in the following 1-3 months,” the bank wrote.
Talk of a coming stock market correction has grown louder in recent weeks as tech stocks have come under pressure. A mix of valuation concerns and worries about the health of the AI trade have fanned fears in the market. Nvidia is down about 7% in five days as it gets ready to report earnings on Wednesday, while the Nasdaq is inching toward a correction.
Worries about a broader pullback were stoked in recent week by top bank executives, who said they wouldn’t be surprised if stocks dropped sharply in the near to medium term.
Goldman Sachs CEO David Solomon said a drawdown of up to 20% in stocks was “likely” over the next 12 to 24 months.
Morgan Stanley’s CEO, Ted Pick, also said he believed a 15% drawdown in stocks was possible, though such a drop would be a positive development for the market after a yearslong rally.
Speaking to Bloomberg this week, Daniel Pinto, JPMorgan’s Vice Chairman, said he believed a correction in AI stocks would “probably” occur in the future. Grace Peters, the co-head of global investment strategy at JPMorgan Private Bank, also told the outlet said she believed a correction of as much as 8% would be “not unhealthy.”