Weekly Index Review - 19 October

US 500 - Monthly

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How far can the US stock market fall?

Goldman Sachs and JPMorgan in recent weeks have downgraded their worst-case scenarios on the US equity market. Both have suggested there could be additional downside, giving targets towards 3,200.

So, this week we are taking a long-term look on the US 500 to put these worst-case scenarios into perspective.

From the monthly chart, we can see how the extension of QE and fiscal stimulus powered the market higher from the pandemic lows in 2020.

The market has since retraced to the “natural” 50 percent area of this move to around 3,500. The 3,200 area suggested as a possibility by Goldman is down at the 61.8 percent retracement level.

The monthly Heikin-Ashi chart clearly shows the extremely powerful trend from the 2020 lows. Could this really be sustained without a more meaningful consolidation?

The bulls will feel relatively comfortable about the long-term prospects while the 3,500 area holds and even on any possible future moves towards 3,200 we could expect heavy long-term institutional buying.

Over this timescale, only moves under 3,200 would start to really rattle the nerves on Wall Street. Moves up towards the 38.2 percent level at 3,800 could occur relatively rapidly if the US corporate reporting season is able to continue the relatively positive start so far and if talk of the “Fed pivot” gathers pace. This produces a relatively positive long-term outlook, despite the 50 percent moves from the pandemic recovery rally - as long as the 3,200 area holds.