After being down as much as 1.4%, S&P 500 futures managed to trim those losses to around 0.7% at the time of writing as the index took a technical bounce from a key support area. But the underlying theme remains risk off, with cryptocurrencies extending their losses ever since Wall Street opened for trading. Thus, US indices could still be heading lower heading deeper into the US session. Wall Street is finally catching its breath after getting a little too carried away with the AI euphoria. This mini correction may not necessarily mark the market top, but take nothing for granted at these still extremely high levels.
Why are stock markets falling today?
After a record-breaking October, the mood has turned a bit sour across the board, with the dollar rising, cryptocurrencies and stocks falling. Mos of the Big Tech’s earnings have painted a story of booming AI investments and solid growth, but doubts are creeping in, and traders are locking in profits and taking a step back. After all, when valuations stretch too far, even a small wobble can send nerves jangling.
There is also the fact that without any fresh catalysts, investors are running out of reasons to stay optimistic. Traders looking for fresh reasons to justify the lofty valuations that have carried markets this far are not finding too many compelling reasons. One concern here is that the leadership has become worryingly narrow, with a handful of mega-cap tech names doing all the heavy lifting, leaving the broader market vulnerable to any wobble in the AI narrative. And we got that with Palantir, often seen as an AI bellwether, failed to deliver the wow factor investors were hoping for.
US government shutdown could be the longest ever
Meanwhile, the ongoing US government shutdown isn’t helping either. It’s dragging on and now looks set to be the longest in history. With official economic data frozen, everyone — from investors to the Fed — is turning to private reports for clues on how the economy’s really doing. The latest signs haven’t been great. The ISM manufacturing index came in weaker than expected, pointing to a deeper contraction.
ADP payrolls up next
Next up is the ADP payroll report on Wednesday, and all eyes are on whether the labour market can hold up amid growing signs of fatigue. A soft print could turn up the pressure on the Fed to cut again in December. But it is safe to say that the Fed is as split as they can be right now, which is why we are seeing mixed signals about what comes next. For example, Chicago Fed President Austin Gooldsmith said he’s not ready to cut rates, warning that inflation is still too high. Meanwhile, Steven Miran thinks policy is too tight and risks choking off growth. The Fed Chair Jerome Powell was somewhere in between when speaking at the FOMC press conference last week. The market’s trying to read between the lines, but expectations for a December rate cut have fallen sharply, from around 90% to less than 70% and this has taken a knock on asset prices.
Technical S&P 500 forecast and key levels to watch
While the market fells quite heavy, it is important to remember that this comes after a run of record breaking gains. This means that there will be plenty of people looking to buy the dip as they have done so successfully in the past. The mid-session bounce was evidence of that when our US SP 500 chart, which aims to track the S&P 500 index, bounce off key support in the region between 6750 to 6765. This area was formerly resistance and is where the 21-day exponential average comes into play. The bounce was therefore hardly a surprise. But if the index were to go below this area, then things might get a little more interesting. In that scenario, we could then see some follow-up technical selling potentially towards 6680 to 6630 where a bullish trend line comes into play. Meanwhile resistance is seen between 6813 to 6820, marking the lows from the previous two trading days. The bears will need to exert pressure around this area and prevent the market from going back above zone. Otherwise, we could be talking about new highs again soon.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
