Are the Dow, S&P 500, Nasdaq 100 and Russell 2000 topping out?

Are US equity indices resuming their multi-year bear markets?

Now that the Dow Jones Industrial Average has wiped out all of this year’s gains and is trading in negative territory year-to-date and that the S&P 500 has fallen through its psychological 4,000 mark and all major US stock indices have formed bearish technical reversal patterns on their daily charts, is the 2021-to-2023 bear market about to resume?

The recent signs of strength in US economic indicators such as the Purchasing Manager’s Index (PMI) which point towards a stronger economy, and hence expectations of further rate hikes by the US Federal Reserve (Fed), combined with heightened tensions ahead of the one-year anniversary of the invasion of Ukraine by Russia, have led to US equity indices selling off.

With the anticipated US Federal Reserve’s (Fed) terminal rate expected to come in higher and rate cuts later than market analysts had expected only a few weeks ago, US - and to a large extent most global - equity indices may be in for a rough patch.

According to Refinitiv the current fed funds rate of 4.50%-4.75% has an 84.5% probability to be raised to 4.75-5.00% at the next 22 March Fed meeting with the terminal rate likely to be coming in at 5.25-5.50% between June and September and no rate cuts before December.

Probability distribution (US Fed)

In view of the likely higher-than-expected rate hikes, US equity indices such as the Dow Jones Industrial Average (Dow), S&P 500, Nasdaq 100 and Russell 2000, which started the year on the back foot compared to their European counterparts but then rapidly caught up, are seen running out of steam.

Year-to-date chart of major US indices

As can be seen on the above chart, with the exception of the Dow, all other major US equity indices so far remain in positive territory year-to-date, but this may soon change, even for the Nasdaq 100 which, despite still being up 10%, has already given back 8% from its early February high.

Can US equity indices resume their multi-year bear markets when asset allocators are the most underweight equities since October 2005?

According to the January Bank of America (BofA) Global Fund Manager Survey, with asset allocators being the most underweight US stocks since October 2005, a huge amount of money may still flow back from bonds into equities.

At the beginning of February flows back into equities have been seen but mainly into European equities and not US equities despite fund managers becoming less bearish about the health of the US economy during February.

According to Lipper fund flow data from 15 February, equity fund outflows have recently been seen but were thwarted by money market fund outflows while bond inflows continued to be seen over the past month but at a diminishing rate.

What do the charts say for the Dow, S&P 500, Nasdaq 100 and Russell 2000

Dow

The Dow Jones Industrial Average has been underperforming its peers since the beginning of the year and is the first major index to trade back in negative territory year-to-date with Tuesday’s over 2% drop and Wednesday’s follow through due to further Fed rate hike fears wiping out all of its 2023 gains.

The late January low at 32,935 represents the next downside target, a fall through which would put the December trough at 32,474 back on the map. If this level were to be slipped through, a medium-term top formation would be confirmed with the June 2022 low at 29,649 being in focus.

Good resistance can be seen along the early to mid-February lows and the 55-day simple moving average (SMA) at 33,512 to 33,602. More significant resistance is to be found at the 34,516 mid-February high.

Only a bullish reversal above the 34,516 high on a daily chart closing basis would negate the current downward pressure.

S&P 500

The S&P 500’s recent sell-off has taken it back to the breached 2022-to-2023 downtrend line which, because of inverse polarity, now acts as a support line, together with the 55-day simple moving average (SMA) at 3,978.

Having said that, the fall and daily chart close below the 10 February low at 4,051 has probable negative implications for the index as it confirms at least an interim top formation.

A further slide through the October-to-February uptrend line at 3,966 and then the 200-day simple moving average (SMA) at 3,939 would confirm a medium-term top which could lead to a slide back towards the October trough at 3,491 being seen.

Only a bullish reversal, break of and daily chart close above the key 4,139 to 4,195 resistance zone would negate the currently bearish outlook. It consists of the September, December and February highs.

Nasdaq 100

Last week’s swift fall in the Nasdaq 100 on the back of stronger-than-expected US producer price inflation and weekly employment data as well as hawkish Fed comments took the index to below its 2023 uptrend line at 12,454 and, more importantly, its previous week’s low at 12,203.

Once the current bounce has run its course and provided it doesn’t lead to the early February high at 12,896 being exceeded, the Nasdaq 100 could easily slip through the 200-day simple moving average (SMA) at 11,892 which would put the October-to-December lows at 10,670 to 10,433 back on the cards.

Russell 2000

The Russell 2000, which by mid-January was outperforming other US indices, including the Nasdaq 100, has also give back nearly half of its gains and, in doing so, slipped through the 1,901 10 February low which is technically significant.

If the late January low at 1,877 were to also be fallen through on a daily chart closing basis, a top would likely be in place with the 200-day simple moving average (SMA) and the mid-January low at 1,181 to 1,800 representing the first downside targets, followed by the 1,701 December low.

Only an advance above the 2,010 early February high would negate the current toppish forecast.