CTAs may accelerate selling and could cut exposure sharply if indexes fall further.
The U.S. stock market came under heavy pressure on Monday as new technical signals raised concern that the latest slide could grow into a deeper correction, according to Bloomberg.
The S&P 500 fell enough to extend its drop from the October 28 record to 3.2%, marking the sharpest retreat from an all-time high since the February-April slump.
The index also closed below its 50-day moving average for the first time in 139 sessions, ending the second-longest run above that line this century.
Traders also watched it fall more than 50 points under 6,725, the level Lee Coppersmith of Goldman Sachs highlighted early in the day as the point where CTAs could switch from buyers to sellers, a move that would add more pressure.
The weakness spread through the rest of the market, with chart watchers describing the internal damage as significant.
Dan Russo of Potomac Fund Management said there is “a lot of damage happening under the surface of the market,” and warned that a break under the 50-day average becomes more serious if it matches a continued drop in breadth.
He said more stocks making new lows would show that “more selling is coming,” a view that reflected the tone across trading desks on Monday.
Traders watch Nasdaq slide as correction builds
More signs of stress showed up in the Nasdaq Composite, where John Roque of 22V Research said the index is flashing “ugly” signals because more of its roughly 3,300 names are sitting at 52-week lows than highs.
He said that “it should be now: a correction is occurring,” and urged investors to stay defensive. John expects the Nasdaq, already down more than 5% from its last record, to fall as much as 8% before it meets support near 22,000.
The warning tone continued as Dan Wantrobski of Janney Montgomery Scott said the S&P 500 breaking its long streak above the 50-day moving average points to more trouble later in the year.
He said “a correction is already happening in the stock market and I think the S&P 500 will fall even further from here,” adding that the index’s slide could reach 5% to 10% by late December.
Dan also described breadth as “terrible” and said the market is “in a vulnerable position,” feeling that it is better for the index to face a smaller correction now to avoid a worse one early next year.
CTA activity may add more weight in the coming days. Maxwell Grinacoff of UBS said those funds, which usually buy when indexes rise and sell when they fall, could cut 20% of their equity exposure over the next two weeks.
He said that the selling “could easily triple in a scenario where global indices go down by 5% or more,” and added that pressure will grow if the S&P 500 dips below 6,500.
Tech slowdown deepens as mega-caps weaken
Tech stocks that drove a 38% rally in the S&P 500 from April to October are now pulling back. Their slowdown has left the market leaning on sectors tied more closely to the slowing economy, weaker consumer demand, and poor confidence numbers.
The Magnificent Seven have dropped almost 4.5% this month, with only Alphabet still in positive territory. That group has supplied nearly all of this year’s gains.
Momentum in the AI trade also faded as investors focused on how much borrowing is needed to fund the expansion.On Monday, Amazon raised $15 billion in bonds, adding to the debt stack tied to the buildout.
John at 22V called Meta the “bellwether for this correction,” saying it started falling before the rest and may have to “make a low” before the pullback finishes. Meta slid again Monday, down 1.2%, leaving it 24% below its August peak.
More pressure is coming this week as Walmart, Home Depot, and Target prepare to report results and discuss the holiday season.Nvidia will close out the megacap earnings cycle when it reports later in the week.
Traders also expect the return of government data after a seven-week gap, with early signs pointing to slower hiring, weaker growth, and more strain on low-income households.
Despite the slide, the S&P 500 is still up more than 13% for the year and the Nasdaq is holding an almost 18% gain. Rotation out of tech continued Monday as health care and utilities rose. Sam Stovall of CFRA said the move “should unwind some of the frothiness built into the growth sectors,” adding that the slump of the past two weeks is “hardly far enough to be labeled a pullback.”
Analysts at Ned Davis Research said the selloff is “contained enough” to keep hopes of a rally alive, but warned that “the longer the consolidation goes without reestablishing the uptrend, however, the higher the risk it evolves into a topping process.”
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