Stock markets have seen increased volatility in recent weeks. Seasonality is at play, and October is almost every year a weak month. Is this a “buy the dip” moment, which is typical for October, or is a major breakdown in 2016 underway?
The S&P 500 peaked in August of this year, after a strong rally since the February bottom, and is now range bound. Today was an extremely important day, and our view is that the next week will be even more important. Let’s examine the facts.
First, the S&P 500 tested an important support line, particularly the breakout level, as seen on the chart. However, prices recovered sharply after hitting a low in the morning, so this could be a reversal pattern. Time will tell.
Second, the S&P 500 bounced from exactly its support line. If support holds, it would be very significant. If support gives away, the key question will be where selling will stop: around 2000 points (Brexit lows), higher, lower?
Third, October is halfway over, so this could be an excellent moment to stabilize before the end-of-year rally kicks in. If not, however, we could be looking at a top formation.
The bearish side of things is that a false breakout took place in August, a scenario which should not be excluded.
With fear assets like gold, Treasuries, and the Yen only mildly rallying, we believe stocks are undergoing a mild retracement and markets are not in a “risk off” mood. Because of that, we look at a “buy the dip” opportunity shaping up in October of this year … until proven otherwise. So far, however, we don’t see enough signs to think that a 2017 stock market crash is in the cards.