Warning Signs for a Breakdown of Order for the S&P 500

With the S&P 500 (Index: SPX) having tumbled some 480 points from its 16 July 2024 record high of 5,667.20 as of Monday, 5 August 2024, it’s a good time to consider whether order might be starting to break down within the U.S. stock market.

That’s especially true because the Nasdaq (Index: COMP) has fallen more dramatically in the last several weeks, entering into correction after dropping by more than 10%. Since many of the biggest stocks within the S&P 500 are even more heavily weighted in the Nasdaq Composite Index, it’s very possible the S&P is well on its way to seeing its established state of order come to an end.

As best as we can tell, that relative period of order began on 30 September 2022 and has continued, so far, through the present. As of 5 August 2024, the S&P 500 would have to fall at least another 153 points in short order to throw up an official warning sign that the market’s current state of order is breaking down. The following chart shows how the current period of relative order for the S&P 500 has evolved, the warning sign that would be triggered would be the value of the S&P 500 dropping below its lower red-dashed curve:

That the current period of relative order in the stock market has broken down would be confirmed by the 20-day moving average for the S&P 500 falling almost 480 points from its current level to cross below the lower red-dashed curve on this chart.

When that happens, the U.S. stock market will most likely enter into a new chaotic period. As the note on the chart indicates, that change of state can happen with very little warning.

Image Credit: Microsoft Copilot Designer. Prompt: “An editorial cartoon in the style of Herblock showing the concepts of order in the stock market on the left hand side and chaos on the right hand side”.

Postscript

Most of the preceding text of this article was drafted on Saturday, 3 August 2024, well ahead of the implosion of Japan’s stock market on Monday, 5 August 2024 and the U.S. stock market’s reaction to the impact of that new information event. Other than updating the chart and adjusting some numbers in the text, we didn’t have to change much of what we had already written.

That said, If the day-to-day change in stock prices continues to be interesting (changing by more than two percent from the previous day’s close), you can use the chart with the latest value of the S&P 500 index to see how close the index is to signaling a breakdown of order in the U.S. stock market. Find the marked data point for 5 August 2024 on the chart, imagine a vertical line passing through it, then point to the position of the latest value of the S&P 500 on that vertical line to see whether its above or below that lower red dashed curve. Falling below that curve is the warning sign.

The confirmation that order has broken down will take longer to play out, since that data is determined by a 20-day moving average. Until then, if the daily value of the index drops below the red-dashed curve and stays below it for many days on end, it would only be a matter of time.