Stocks are on the back foot, with bulls continuing to hang on to optimism for lower rates and bears beginning to benefit from extended multiples plus weakening technicals. Near-term, bulls are likely to benefit from last Friday’s intraday reversal, even as bears are eyeing to get active at support-turned-resistance.
 

From the October 29^th intraday all-time high of 6920 to last Friday’s session low of 6522, the S&P 500 gave back 5.8 percent, then bids showed up to end the week down two percent to 6603. From last month’s high, it is now down 4.6 percent, which is nothing considering the overall situation. From April’s low of 4835, the large cap index surged 43.1 percent to last month’s high. For the year, it rallied 17.7 percent before coming under pressure in the last three weeks. In both 2023 and 2024, the index rallied north of 20 percent.

Bulls are sitting on tons of paper gains. The technically oriented ones in particular are therefore probably watching if crucial levels will hold. Last Friday, they were tested, with success. Horizontal support at 6550s goes back to September; the support was breached intraday Friday but saved by close (Chart 1). This is positive for the bulls – at least in the near term – but the worry for them is that the 50-day moving average (6711) has been breached. Most notably, last Thursday’s action in which the S&P 500 reversed from a session high 6770 to a close of 6539 is worrying for the bulls; the resulting bearish engulfing candle slicing through the 50-day can be ominous if longs do not get their act together soon.
 

The same candle also formed on the Nasdaq 100 last Thursday, with an intraday high of 25223 and a close of 24054. In the following session, Thursday’s low was compromised, but tech bulls showed up at horizontal support at 23800s (Chart 2). By that time, the index was down 8.9 percent from the October 29^th peak of 26182. Thursday’s bearish engulfing candle was followed by Friday’s spinning top, closing the week at 24240, still down 3.1 percent for the week. This was a third down week in a row.

As is the case with the S&P 500, should a rally ensue near term, there are lots of levels where bears can show up. The 50-day is at 24950, followed by 25200s, which also lines up with Thursday’s high.
 

Bulls also appeared at support on the Russell 2000 last Friday; through the session low 2303, the small-cap index was down 9.4 percent from the all-time high of 2542 posted on 15 October. Thanks to Friday’s intraday reversal, the index closed the week at 2370, only down 0.8 percent for the week. But unlike the other two large-cap indices, the Russell 2000 had already lost the 50-day (2445), which is now beginning to point down.

Earlier, the Russell 2000 had also failed to build on a major breakout. A year ago in November, it retreated after ticking 2466. Three years before that, in November 2021, the index rallied to 2459 and reversed lower. This year, on 18 September, those highs were taken out, tagging 2470 intraday. In the subsequent weeks, the Russell 2000 then reached a new high of 2542 by October 15^th before going sideways. Three weeks ago, the index was pushed back below those highs (Chart 3).

From small-cap bulls’ perspective, the good thing is that major horizontal support – and breakout retest – at 2300 was defended last Friday. The question is what comes out of it, and how soon.
 

Besides the technical aspect to Friday’s trading, something else might be in play as well for the intraday reversal.

John Williams as head of the New York Fed is unlike any other regional bank president; New York has a permanent seat in the FOMC (Federal Open Market Committee). Of late, there has been a decided hawkish shift in speeches of several FOMC members. In the futures market, traders were not sure if a cut was coming next month; until just a few weeks ago, they had their money on a 25-basis-point cut, followed by a persistent rise in odds of a no cut. Then comes a speech by Williams last Friday saying “further adjustment in the near term” for interest rates was likely. The phrase “near term” is vague, but markets are now betting it meant December. Probabilities for a cut in next month’s meeting are currently over 75 percent. This is then expected to be followed by at least two more cuts next year, ending 2026 at a range of 300 basis points to 325 basis points (Chart 4). In September last year when the Federal Reserve began an easing cycle, the rates were between 525 basis points and 550 basis points. They are currently between 375 basis points and 400 basis points.

If the futures market is right, and the fed funds rate is lowered by at least 75 basis points by the end of next year, that can act as additional juice for risk-on sentiment. That is bulls’ hope. But they are at the same time having to deal with elevated multiples.
 

At the end of September, the S&P 500 ended with an operating price-to-earnings ratio of 26.2x (Chart 5). As of last Tuesday, 94 percent of these companies were done reporting their September quarter. The sell-side expects $263.45 this year and $306.11 next. Numbers have been gradually revised lower over time, as 2025 was as high as $277.86 in July last year and 2026 was $310.02 this January. If the consensus is right, earnings would have grown 12.9 percent this year and 16.2 percent next. Next year’s in particular looks too optimistic. Even if the sell-side’s 2026 optimism comes through, the S&P 500 already trades at 21.6x on 4Q26 earnings – not cheap by any stretch of the imagination.
 

Chart 6 paints the same picture as far as extended multiples are concerned. At the end of the September quarter, the S&P 500 sported a price-to-sales ratio of 3.3x – a fresh record.

That said, there is no guarantee the metric cannot continue higher. The June quarter’s 3.1x was a record as well, but the S&P 500 went on to rally another 7.8 percent in the third quarter. But the danger with extended multiples is that each push higher raises the odds of a reversal. Hence the selling pressure of the last three weeks. If bulls cannot rebuild momentum on Friday’s reversal and downward momentum reasserts itself, then a test of the 200-day at some point is not out of the question.

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