The S&P 500 Index (^SPX) fell to year-to-date lows last week. At 6624.70, the large-cap benchmark also broke below its 200-day moving average – the first break below that support level going back a year. If this selling persists, keep some key trading data points on your radar, writes Lucas Downey, co-founder of MoneyFlows.
Last March was a tough time for markets as April saw the Liberation Day crash. Now, I’m not predicting another meltdown of that magnitude. However, our trusty Big Money Index (BMI) is falling hard…suggesting heavy outflows recently.
Late last week, the BMI broke down to 49.7%, the lowest level since early December. Tech and financial stocks are feeling the brunt of the weakness, while energy stocks are under accumulation.
Two key oversold BMI readings are 35% and 25%. A 35% BMI indicates heavy outflows and initial oversold conditions. This is the area we breached during the Liberation Day crash and we prepared you for an unthinkable rally.
A 25% BMI indicates extreme oversold conditions like Covid-19, 2022, and October 2023. At the Covid-19 bottom in March 2020, the green light flashed and we told you to buy it all.
No one has a crystal ball. But if we do approach 35% or 25% on the BMI, here’s a game plan of what to expect.
Analyzing prior episodes when the BMI fell to 35%, the S&P 500 typically reaches a correction zone (11% – 15% drawdown from peak). If that’s the case, plan for the S&P 500 to approach 6,200 or lower, roughly 6% lower than recent levels.
Now let’s look at a BMI breach of 25%. This indicates extreme oversold conditions. These are never fun and are ultra rare. These typically occur once every two years. The S&P 500 would likely break below 6,000 if this were to happen.
Anyone who’s been with us during extreme oversold conditions can attest to how fast markets often recover…it’s paramount to study money flows during these events. I don’t say this to scare you. I say this to prepare you. Traders need to be armed with cutting-edge data as markets fall under pressure.
