Is the Sky Falling for the S&P 500 Index?

• The S&P 500 extended its long-term uptrend to a high of 4,607.07 during July before closing the month at 4,588.96.
• The same index came under pressure early this month, dropping almost 1.5% on Wednesday, August 2.
• While the break created plenty of Chicken Little-like squawking from the industry, the reality is the move looks to be seasonal.

It was inevitable, I suppose, given the S&P 500 ($INX) finished July within sight of its monthly high. After all, US boxed beef markets showed the US labor market cooled a bit last month, all while the Federal Open Market Committee had followed through on its expected 25 basis-point rate hike with another one expected in September. Additionally, it was reported funds had moved to their largest short position in US Treasuries in years by late July. Given all this, again, it was inevitable the S&P would take a breather. As July came to an end the index sat at 4,588.96, its highest monthly close since December 2021 at 4,766.18. Recall it was the next month, January 2022, when the $INX completed a bearish key reversal[i] turning the long-term trend down. This trend last until this past October when the same index completed a bullish spike reversal[ii]turning the long-term trend up again. 

August started slowly, with the S&P 500 finishing Tuesday (August 1) down about 12 points. But then Wednesday rolled around and the same index fell as much as 71 points before closing 63 points lower for the day. This was enough to spark the canned squawking of Chicken Littles across the industry that the sky was falling. After all, it was the first time in 47 days (if I recall) the S&P 500 had lost more than 1% with its 1.4% daily loss. “The end is nigh!”, was basically the theme of the day as the sun set on Hump Day. 

The funny thing is though, the sky is not falling, nor is the end nigh. The reality is markets seldom go straight one direction or the other, unless of course that market is the famed Widow Maker (aka natural gas). But that’s a discussion for another day. What we are seeing is nothing more than a normal seasonal downturn by the S&P 500. Nothing more. Certainly nothing to get worked into a frenzy over. 

A look at the seasonal indexes for the $INX shows the index tends to post a high weekly close the second week of August (next week) before falling 5% (based on the 5-year index, red line), 3% (based on the 10-year index, blue line), 2% (20-year index, purple line), or 1% (30-year index, gray line). A rough average of the difference indexes tells us we should expect the S&P 500 to drop about 2.75% during August and September. 

Recall that my seasonal indexes are themselves averages, so weekly high and low closes tend to occur around the average. Given this, what looks to be the high weekly close in 2023 (green line) the last week Friday of July (4,582.23) fits the seasonal tendency. If we use that price as the starting point for the expected selloff the target area is between 4,536 (1%, 30-year index) and 4,353 (5%, 5-year index), with a 2.75% drop coming in at 4,456. Again, those would all be expected low weekly closes. 

What happens once we get through September? The various timeframes show us the S&P 500 tends to gain anywhere from 6% (5-year index) to 4% (30-year index). 

So rather than everyone running around like a Chicken Little with its head cut off, the more logical approach might be to look at this as a seasonal bullish opportunity. 

[i] A bearish key reversal is when a market goes to a new high before falling below the previous timeframe’s (daily, weekly, monthly) low and closing lower for the timeframe. 

[ii] A bullish spike reversal is when a market moves to a new low before rallying to close higher for the timeframe. 

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