Technical Analyst, Saxo Bank Group
Summary: The Financial Crisis in 2007-2008 was different compared to the one currently unfolding, but the market reaction is similar. Russell 2000 small cap and S&P 500 are forming technical pictures identical to 2007-2008. If the Equity market continues to react as it did in 2008 there is much more trouble ahead for Equities.
Russell 2000. Is it 2007-2008 all over again?
It certainly looks that way. Below are two weekly charts of the Small Cap Index Russell 2000 with weekly Simple Moving Averages (MA) added. Orange line is 21 MA, Blue is 55 MA, Pink is 100 MA and Red is 200 MA.
The first chart is from 2007-2008. The second from 2022-2023.
If we start by looking at the movement of the Index it itself i.e., without paying attention to Moving Averages the movements are almost similar 2007 vs 2022. The trends and corrections are similar.
Comparing the movement of the Index then and now they are almost identical. 21 MA has dropped below 55 and 100 and has moved up and down around the 200 MA.
55 MA has crossed over 100 and 55 is close to cross over the 200 MA. That is quite a few Death Crosses.
Twice has Russell 2000 failed to break above 100 MA only be sent back below the 200 MA as it did back in 2007. Russell 2000 could be on the verge of a massive sell-off. If it closes below 1,641 that could very well be the scenario.
Russell 2000 2007-2008:
Russell 200 has broken bearish out of its rising channel like pattern and seems set for lower levels.
Key support at around 1,641. If that is taken out there is no strong support until around 1,460.
IF Russell 2000 is to drop as much as it did back in 2008, which was +40%, the Index would be back to the Pandemic scare trough March 2020.
For this Bearish scenario not to play out a close above 2,000 is needed.
S&P 500
Similar behaviour in S&P 500. Again first chart is from 2007-2008. The second from 2022-2023.
21 MA below 55 and 100 but still above 200 MA – for now. 21 Ma below 55 and 100 MA’s. S&P is below 55 and 100 MA.
IF S&P 500 and the 21 MA close below the 200 MA that could be the signal for lower Index levels.
S&P 500 2007-2008:
If S&P 500 closes below 3,764 next support is 3,509 and 3,210.
Short-term it was rejected at the short term falling trend line twice and is still in a downtrend. If closing below 3,800 the bearish scenario is likely to play out.
To demolish the bearish scenario similar to 2007-2008 a close above 4,200 is needed.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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