S&P 500 Outlook Grim, Studies Warn US Stocks to Keep Falling

S&P 500, Dow Jones INDUSTRIAL AVERAGE, CAC 40, DAX 30 – TALKING POINTS:

  • Retail traders pile into contracts tracking US, European stock benchmarks
  • Contrarian sentiment and positioning studies hint equity selloff to continue
  • S&P 500 technical positioning bolstering the case for deeper losses ahead

Retail traders appear to be betting that recent stock market losses present a buying opportunity. IG Client Sentiment (IGCS) statistics show sharp gains in long exposure on contracts tracking bellwether US equity benchmarks – the S&P 500 and the Dow Jones Industrial Average – as well as France’s analogous CAC 40 and Germany’s DAX 30.

See the full IGCS sentiment report here.

The number of IG traders betting on US stock market gains rose by close to 70 percent compared with last week, while net-long exposure to instruments tracing the path of French and German shares surged 166.2 and 108.6 percent over the same period. IGCS is typically a contrarian indicator, so the swell in buying suggests equity markets may continue to face selling pressure.

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Technical positioning seems to support the case for weakness. The appearance of negative RSI divergence preceded a broad-based downturn, as expected. The culprit has been flagged as the outbreak of the Wuhan-strain coronavirus, although it might be argued that it acted as a trigger for an already-brewing shakeout rather than a stand-alone catalyst.

The pace-setting S&P 500 index has sliced through support levels defining the upward trajectory since the beginning of 2019, signaling a substantial trend reversal is afoot. A daily close below the next support later in the 2806-25 area targets barriers at 2726.50 and in the 2603-26 zone thereafter. Reclaiming a foothold above 3029.50 seems like a prerequisite for taming immediate selling pressure.

S&P 500 stock index price chart - daily

S&P 500 E-mini futures daily chart created with TradingView

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— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

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