While the benchmark S&P 500 index has consistently defied gravity, it may not be exempt from the golden rule: what goes up must eventually come down. Indeed, the loss of the psychologically important 5,000-point level may be more than just a blip on the radar. Instead, it raises the possibility of a stock market crash.
On the technical front, Lawrence G. McMillan, president of MacMillan Analysis, sounded the alarm about a support line breaking down. Per an article published by MarketWatch, the S&P 500 fellow below a support line established at 5,050 points. “That changes the investment picture to a large extent,” wrote the investment commodity trading advisor. McMillan added the following:
“The 5,050-5,180 area had been a strong base for the launch to new all-time highs in late March. So, the fact that the market has not been able to stem the tide of the selling that began with the CPI number two weeks ago and has continued with geopolitical worries is significant. Once that 5,050 area was broken, some fairly heavy technical selling came in.”
The expert mentioned that the index closed below 5,050 for two consecutive days, with April 18 being the second day. Therefore, this circumstance has officially eliminated its “core” bullish position. While that doesn’t necessarily equate to a stock market crash, the odds are moving in an unfavorable direction.
Worrisome Fundamentals Highlight the Possibility of a Stock Market Crash
To be sure, the technical situation reflects the fundamental backdrop — and that too does not look compelling. In particular, flaring tensions in the Middle East may lead to events that could potentially trigger a stock market crash.
Last weekend, Iran launched a barrage of missiles and drones against Israel. Government officials claimed it did so in response to a bombing of Iran’s consulate in Syria, an attack which Iran pinned on Israel. Reports have emerged that Israel has now struck back at Iran, which again raises the specter of a stock market crash.
As The Wall Street Journal reports, the scope of the Israeli response was “narrow.” Significantly, Iranian media outlets are downplaying the incident, suggesting that both sides want to cool tensions. However, as the WSJ pointed out, a miscalculation may metastasize into a broader regional conflict.
Should such a miscalculation occur, a fear exists that global oil supplies could be disrupted. That may have an inflationary impact, representing a possible trigger for a stock market crash.
What makes the problem challenging is that energy prices contributed to a hotter-than-expected inflation reading. And that may have downwind implications for consumer sentiment. Content streaming giant Netflix (NASDAQ:NFLX) was the first of the mega-capitalization technology firms to report earnings. Unfortunately, soft revenue guidance for the current quarter led to a sharp drop in its share price.
Why It Matters
A stubbornly hot inflationary environment also clouds the Federal Reserve’s monetary policy aim of lowering interest rates. Subsequently, several popular growth-oriented tech enterprises, including Super Micro Computer (NASDAQ:SMCI) and Nvidia (NASDAQ:NVDA) have floundered. Again, it’s not proof of a stock market crash, but the wind is not blowing in the right direction.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
