Slumping U.S. stock market technical indicators flash warning sign

Worries that the benchmark index may return to its mid-June bear market low have been stoked by deteriorating indicators used by investors to assess the health of the U.S. stock market.

NEW YORK 

After a strong summer run, the S&P 500 has fallen 7% since mid-August due to fears that the Federal Reserve may raise interest rates more than initially anticipated in an effort to lower consumer prices from their 40-year highs.

Market breadth, which displays whether a sizable number of equities are gaining or dropping simultaneously, is one element investors research. Positive market breadth, which occurs when more stocks are rising than falling, indicates that stock bulls are quite confident.

Market breadth has recently begun to exhibit unsettling signs. In the Russell 3000, the proportion of equities that are trading above their 50-day moving average has decreased from roughly 86% in mid-August to about 30% today.

According to data from Thrasher Analytics, the 15-day moving average of the percentage of S&P 500 stocks reaching new three-month lows has increased from slightly above zero in mid-August to about 10% today, another indicator of stock market breadth. At the time of the June market trough, it was at about 60%.

According to BofA Global Research, the index has historically returned -3.56% in September when it is under the 200-day moving average during a year in which the United States hosts midterm elections, as it will in 2022. The index has risen by almost 1% so far this month.

The index has saw a negative development earlier this year when it violated the so-called neckline of the head and shoulders configuration. According to ICAP analyst Brian LaRose, the Nasdaq might trade as low as 8,800 if it breaks through its recent low of approximately 10,500. The index reached 11,862 on Thursday.

The benchmark 10-year Treasury yield peaked at around 3.5% on June 14—the day before the S&P 500 reached its most recent low.

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