Stocks had another rough week here in the US, with the S&P 500 falling 64 bps, adding on to last week’s drop of 2.5%. For the month, the index is down about 5.2%. Indeed, nothing to cry over given the big move higher we have seen since the March lows. 

But there are at least a few internals signs that would suggest the selling may not be over and that there is more to risk to the downside. For example, the advance/decline line has been making a series of lower highs, a sign the number of stocks moving higher is growing less extensive, but instead getting smaller. 

The number of stocks above their 50-day moving average is still around 51.5% in the S&P 500. This is in spite of the index itself falling below the 50-day moving average on the S&P 500. During past periods of volatility, we typically see this reading bottom out at lower levels. 

Additionally, we have seen little, if any, fear building in the market, with a put to call ratio of 0.94. This would suggest that investors are still trading calls at a faster pace than puts. It is an indication that there is not much fear in the market. 

Meanwhile, the VIX index confirms the notion that there has been little to no activity taking place in the options market, with investors not looking to buy protection on the broader index. A VIX at 26 implies a daily move in the S&P 500 of around 1.6% over the next 30 days. To get the VIX moving up, we will need to see more put buying or greater volatility in the market. More put buying will lead to significant volatility.

Not Oversold

But even from a technical perspective, there may be more downside ahead with an RSI that is still around 43, well above the needed decline below 30 to indicate the index is oversold. Meanwhile, the index is still above its lower Bollinger Band, again suggesting the index is not oversold. 

Flight To Safety

Additionally, there has been little to no flight to safety yet, with yields remaining unchanged. 

While there has been little to no change in the dollar index. 

2860

So how far could the S&P 500 fall? As I have discussed previously, the level I am targeting is around the 2,860 region. That is where there is a rather large gap that needs to be filled from the middle of May. It would also mark about a 50% retracement off the lows from early March.

By chance or not, that would also bring the S&P 500 2021 PE ratio back to 17.5, assuming $163 in earnings for the index next year. At least, that is how I’m thinking about it at this moment in time.