Bank of America has issued a warning that the S&P 500 may experience an additional 5% decline to test a critical support level, according to Michael Hartnett, an investment strategist at the bank.
Hartnett emphasized the importance of the S&P 500’s 200-week moving average, which currently stands at 3,941, as a significant line in the sand. A sell-off to this level would entail a 5% drop from the S&P 500’s current level of approximately 4,143.
The 200-week moving average tracks the S&P 500’s average price over the past four years, and it has consistently trended upward since 2012. During the past decade, the S&P 500 has shown a tendency to test this line during periods of market stress.
Historically, market sell-offs in 2011, 2016, 2018, and 2022 all resulted in the S&P 500’s 200-week average being tested, with the index subsequently rebounding from that level to continue its multiyear upward trajectory.
It’s important to note that during the initial stages of the COVID-19 sell-off in March 2020, the 200-week moving average was temporarily breached and failed to provide immediate support.
The potential for a sustained decline to the 200-week moving average appears to be increasing, particularly as the S&P 500 equal-weight index has fallen below a level that Hartnett previously identified as critical.
Moreover, the S&P 500 has recently broken below a shorter-term technical support range of 4,180 to 4,195, as indicated by Katie Stockton, a strategist at Fairlead Strategies.
However, there are indications that investors are seizing opportunities presented by the recent decline in mega-cap tech stocks. Hartnett observed a significant inflow of funds into the tech sector, marking the largest inflow in eight weeks, with investors allocating $2.0 billion toward tech stocks.
Hartnett summarized the situation by noting that investors are “buying the dip” in the tech sector.
