Manage Risk by Monitoring Key Levels in the Indices
Reaching certain price milestones can mean it’s time to take action
- Political uncertainty has increased with President Joe Biden’s withdrawal from the 2024 presidential race.
- Volatility in the markets is expected to increase in autumn—and not only because of the election. September and October are usually the most volatile months.
- To prepare for a potential near-term correction, active investors should monitor levels of support in the equity indices.
The first half of the 2024 trading year was calmer than anticipated, with major averages steadily climbing higher. Lulled by that upward drift, active investors largely assumed the upcoming presidential race would be a familiar contest between President Joe Biden and former President Donald Trump. Both candidates have overseen prosperous markets, which probably contributed to complacency.
However, the landscape shifted dramatically with President Biden’s unexpected withdrawal from the race. The sudden emergence of a new contender for the nation’s highest office—likely Vice President Kamala Harris—has injected a fresh wave of uncertainty into the political and economic arenas. As a result, it’s likely the markets will see increased volatility in the third quarter.
The levels to monitor in the major equity indice
Just before President Joe Biden announced he was pulling out of the race, the stock market experienced two consecutive days of sharp declines on July 18 and 19. Although the market rebounded on July 22, the volatility observed on those two days may have foreshadowed a near-term correction.
Considering this context, active investors should monitor levels of support and resistance in the equity indices. If the market continues its downward trajectory, for example, keep a vigilant eye on key support levels.
A logical starting point is a 10% decline from recent highs. With the S&P 500 reaching a year-to-date high of 5,670, a 10% drop would bring it down to approximately 5,103. If this threshold is breached, attention should then turn to the next significant support level. Historical data points to a level slightly below 5,100—closer to 4,970—reflecting the S&P 500’s lowest point of the year (in April 2024).
Beyond this, two additional downside targets warrant close monitoring. The first is a 20% decline from the recent highs, translating to around 4,536 in the S&P 500. The second critical level is where the current rally commenced, near 4,100. That’s where the S&P 500 bottomed last October.
Turning to the Nasdaq Composite, a 10% decline from its 2024 peak would bring it to approximately 16,804, while a 20% drop would target around 14,937. Currently, the Nasdaq Composite is trading at about 18,000, not far below its 2024 high of 18,671.
For active market participants seeking to reinvest capital during a pullback, these levels offer a structured approach to dollar-cost averaging into new positions.
Note that active investors can use the major indices as indicators and deploy capital in individual stocks or sector/thematic exchange-traded funds (ETFs), instead of the indices themselves. For instance, one might consider purchasing Nvidia (NVDA) stock if the Nasdaq Composite dropped to 16,804 (a 10% correction) or 14,937 (a 20% correction), assuming that position matched one’s strategic approach and outlook.
Election or not, market volatility typically increases in autumn
For context, volatility in the stock market has been unusually low in 2024. This has been somewhat of a surprise considering that 2024 is a major election year.
For instance, data compiled by the Kobeissi Letter indicates the S&P 500 hasn’t experienced a single-day decline of at least 2% in more than 350 days (detailed below). That marks the longest stretch in the last 14 years, underscoring how bullish sentiment has dominated the markets during the first seven months of trading.
That said, the stock market did stumble July 18 and 19. And the major indices—the S&P 500 and Nasdaq Composite—have now fallen off 2024 highs.
Financial markets thrive on stability, and the recent upheaval within the Democratic party seems to be a logical candidate for increased volatility in the markets. Adding to this, September and October are often the most volatile months for the stock market, further compounding the potential for heightened market fluctuations in the coming months.
Moreover, valuations in the market are now at the higher end of the historical spectrum (illustrated below). That means any letdown in corporate earning could cause a pullback—even if it’s only a garden variety temporary 10% correction.
With that in mind, active investors would be well advised to manage risk appropriately if the stock market surges back toward all-time highs. In addition, preparing for a pullback—whether it’s defensive or offensive—might also be prudent.
For more insight into the current trading dynamic in the major market indices, readers can check out this new installment of Market Measures on the tastylive financial network
Andrew Prochnow has more than 15 years of experience trading the global financial markets, including 10 years as a professional options trader. Andrew is a frequent contributor of Luckbox Magazine.
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