The S&P 500 Just Flashed Its Scariest ‘Crash’ Signal Yet

May 19, 2020 4:19 PM UTC
The U.S. stock market is facing a critical inflection point that could dictate the flow of trade in the short term.
  • The S&P 500 Index declined by as much as 0.5% on Tuesday.
  • The large-cap index is facing a bearish triple-top formation that threatens the latest rally attempt.
  • Markets have significantly discounted negative earnings surprises, with Q1 2020 shaping up to be the worst quarter since 2009.

The U.S. stock market struggled for momentum Tuesday after failing to build off a strong start to the week, as geopolitical tensions and a giant “bait-and-switch” from Moderna (NASDAQ:MRNA) kept investors on edge.

For the S&P 500 Index, the sudden pullback has exposed a bearish triple-top formation that foretells of an ominous drop in the not-too-distant future.

S&P 500 Under Pressure

The S&P 500 Index declined by as much as 0.5% Tuesday morning, reaching an intraday low of 2,937.75. The benchmark has now tried and failed to break above the 2,950 resistance for the third time.

In technical speak, that’s a triple-top formation, which suggests the next move will probably be a retest of support. That level is below 2,800, based on ZeroHedge’s analysis of S&P 500 e-mini futures.

S&P 500 futures are eyeing a re-test of support after failing to break 3,000. The futures contract reached an overnight high of 2,976 before reversing gains. | Source: ZeroHedge

A triple-top often precedes a large correction or even a crash as the bulls lack the conviction to keep prices moving higher.

The large-cap index hasn’t traded above 3,000 since early March when it was in a protracted downtrend. Stocks would eventually reach the bottom on Mar. 23 before rebounding more than 30%.

Q1 Earnings Disaster

Equity markets have been surprisingly resilient to dismal corporate earnings–so much so that the S&P 500 has discounted what’s likely to be the worst earnings season since 2009.

As FactSet reports, investors are “not punishing S&P 500 companies reporting negative [earnings per share] surprises in Q1.”

Blended Q1 earnings are down 13.8% year-over-year, based on 90% of S&P 500 companies to have reported so far.

Despite the downbeat earnings guidance, not all companies have been impacted negatively by coronavirus-related lockdown orders. Analysts at Ned Davis Research say the majority of S&P 500 companies are virus “winners,” which means they may have benefitted from the pandemic.

Walmart (NYSE:WMT) is one of the most prominent examples. The retail giant reported Tuesday that revenues from stores and digital channels surged in the first quarter.

Comparable sales in the U.S. climbed 10% year-over-year, while e-commerce revenues spiked 74%.

But at the other end of the spectrum are companies like J.C. Penny, Neiman Marcus Group, and J.Crew Group–all of which have filed for bankruptcy protection amid the pandemic.

Coronavirus lockdowns have also impacted smaller businesses, which employed 60 million Americans before the pandemic. According to the Society for Human Resource Management, 52% of companies expect to close within six months.

Disclaimer: The opinions expressed in this article should not be considered investment advice from CCN.com.

Josiah Wilmoth edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

Last modified: May 31, 2020 7:29 PM UTC

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Financial Editor of CCN.com, Sam Bourgi has spent the past decade focused on economics, markets, and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE, Yahoo Finance, and Forbes. Sam is based in Ontario, Canada and can be contacted at sam.bourgi@ccn.com or at LinkedIn. Visit his Muck Rack profile here. Sam Bourgi is a Trusted Journalist.