S&P 500 Coiled Beneath Key Highs
After a wild and volatile summer, the S&P 500 finds itself in a tight range, coiled beneath all-time highs as we head into September—a month historically known for its weakness. The S&P 500’s recent behaviour suggests a potential breakout, but the question remains: which direction will it take?
A Roller-Coaster Summer
The S&P 500 hit new all-time highs in mid-July, fuelled by optimism surrounding strong corporate earnings and hopes for a resilient US economy. However, this euphoria was quickly followed by a near 10% correction in less than a month, rattling investor confidence. The sharp sell-off was a stark reminder of the market's inherent volatility, driven by concerns over interest rate hikes, geopolitical tensions, and the ever-present threat of inflation.
Yet, as quickly as the market fell, buyers swooped in, leading to a swift V-shaped recovery. This rapid rebound brought the S&P 500 back towards its all-time highs, demonstrating the market’s resilience and the underlying strength of the current bull market. But, over the past two weeks, the S&P 500’s price action has been characterised by a tight range, forming the narrowest weekly range in over seven weeks for two consecutive weeks. This price compression has set the stage for what could be a significant move.
S&P 500 Daily Candle Chart
Past performance is not a reliable indicator of future results
The Nature of Price Compression
Price volatility is often cyclical, and after a high-volatility summer marked by dramatic swings, the S&P 500 is experiencing a period of low-volatility price compression. This kind of behaviour—coiling within a narrow range—typically precedes a significant breakout, as the market builds up energy before releasing it in one direction or the other. The question is whether the breakout will align with the longer-term bullish trend or if we will see a reversal.
The S&P 500’s dominant trend is undoubtedly bullish with the 50-day moving average comfortably above the 200-day moving average, indicating strong underlying momentum. Historically, price compression of this nature tends to resolve in the direction of the prevailing trend, which in this case, points to a bullish breakout. However, the market’s memory of the sharp sell-off that occurred at the July highs could act as a psychological barrier, creating a potential battleground for bulls and bears around these levels.
Seasonality: A Double-Edged Sword
While the technical setup may appear bullish, it's crucial to consider the impact of seasonality. Historically, September has been the weakest month for the S&P 500, with the index falling by an average of 0.6% since 1945, according to data from CFRA. This seasonal weakness could be a headwind for the market, as investors often become more risk-averse after the summer and ahead of the final quarter of the year.
On the other hand, November and December are typically strong months for the S&P 500, buoyed by the holiday season and year-end portfolio adjustments by institutional investors. If the market can navigate the choppy waters of September without a significant breakdown, the seasonal tailwinds in the final months of the year could provide the impetus needed to push the S&P 500 to new highs.
Average S&P 500 Performance by Month
Past performance is not a reliable indicator of future results
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83.51% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
A Roller-Coaster Summer
The S&P 500 hit new all-time highs in mid-July, fuelled by optimism surrounding strong corporate earnings and hopes for a resilient US economy. However, this euphoria was quickly followed by a near 10% correction in less than a month, rattling investor confidence. The sharp sell-off was a stark reminder of the market's inherent volatility, driven by concerns over interest rate hikes, geopolitical tensions, and the ever-present threat of inflation.
Yet, as quickly as the market fell, buyers swooped in, leading to a swift V-shaped recovery. This rapid rebound brought the S&P 500 back towards its all-time highs, demonstrating the market’s resilience and the underlying strength of the current bull market. But, over the past two weeks, the S&P 500’s price action has been characterised by a tight range, forming the narrowest weekly range in over seven weeks for two consecutive weeks. This price compression has set the stage for what could be a significant move.
S&P 500 Daily Candle Chart
Past performance is not a reliable indicator of future results
The Nature of Price Compression
Price volatility is often cyclical, and after a high-volatility summer marked by dramatic swings, the S&P 500 is experiencing a period of low-volatility price compression. This kind of behaviour—coiling within a narrow range—typically precedes a significant breakout, as the market builds up energy before releasing it in one direction or the other. The question is whether the breakout will align with the longer-term bullish trend or if we will see a reversal.
The S&P 500’s dominant trend is undoubtedly bullish with the 50-day moving average comfortably above the 200-day moving average, indicating strong underlying momentum. Historically, price compression of this nature tends to resolve in the direction of the prevailing trend, which in this case, points to a bullish breakout. However, the market’s memory of the sharp sell-off that occurred at the July highs could act as a psychological barrier, creating a potential battleground for bulls and bears around these levels.
Seasonality: A Double-Edged Sword
While the technical setup may appear bullish, it's crucial to consider the impact of seasonality. Historically, September has been the weakest month for the S&P 500, with the index falling by an average of 0.6% since 1945, according to data from CFRA. This seasonal weakness could be a headwind for the market, as investors often become more risk-averse after the summer and ahead of the final quarter of the year.
On the other hand, November and December are typically strong months for the S&P 500, buoyed by the holiday season and year-end portfolio adjustments by institutional investors. If the market can navigate the choppy waters of September without a significant breakdown, the seasonal tailwinds in the final months of the year could provide the impetus needed to push the S&P 500 to new highs.
Average S&P 500 Performance by Month
Past performance is not a reliable indicator of future results
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83.51% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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