# The S&P 500 Is Going To Move Much, Much Lower

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## The S&P 500 Is On The Brink Of Major Collapse

The S&P 500 is going to move much, much lower. The broad market index has been pushed to it’s breaking point and frankly, I think the cracks are already showing. The underlying fundamental conditions remain positive, it’s not like we’re in a recession, but the fear of recession is real and it is festering. The biggest news in terms of recession and what may happen and when is the yield-curve. The U.S. yield-curve went into full-inversion early this week and signals recession will come within 18 months. The caveat though is this, the data and some experts think it is a false signal. This week’s round of economic data wasn’t strong, it wasn’t robust, but it was positive, in some cases accelerated, and labor markets remain tight, the consumer healthy.

The daily chart of the S&P 500 is painting a mixed-picture. In some ways the index looks like it could throw off a pretty strong buy signal but I think that is just hope lingering. The MACD is bearish but shows a double peak where the second is lower and consistent with support at current levels. Current levels appear to be supportive because the price action is forming a potential Double Bottom Reversal. The risk is that price action is still low within the potential reversal pattern, resistance is likely strong at the short-term EMA, and stochastic does not even come close to confirming. Stochastic is still pointing lower which means the overall trend is still down and, since momentum is still bearish, I think we’re going to see prices move lower rather than higher in the near term.

The weekly chart of the S&P 500 is more bearish. In fact, it is just plain bearish. Both MACD and stochastic have formed bearish crossovers in tandem with the index peak. The index has moved below the previous all-time which is a very important support/resistance pivot point. Since the fall, the index has retested and confirmed resistance at this level where I think resistance will remain. The long-term 150 day EMA is providing some support but it is tenuous. A move below the 150-day moving average would be very significant, such a move could lead the S&P 500 down to the 2,700 or 2,600 level.

The key will be what happens on Monday. Monday is when the Weekend Warriors do a lot of their trading. They’ve had the weekend to think about what’s happened, all the gurus (myself included) will have put out their analysis, and the urge to sell may be strong. Maybe not, we’ll see. If prices rally on Monday, for whatever reason, I won’t be bullish until I see the index get back above 2,940.

## How Much Farther Will the S&P 500 Drop? Much Lower, Goldman Sachs Says.

#### A screen shows a graph before the opening bell at the New York Stock Exchange (NYSE) on March 16, 2020 at Wall Street in New York City.

The S&P 500 index on Monday had its worst trading day since 1987, down 12% from Friday’s close. The market benchmark, which closed at 3386.15 less than a month ago on Feb. 19, ended the session down to just 2386.13.

A team of strategists at Goldman Sachs thinks the index will end the year at 3200—but they see a bottom at 2000 along the way.

“The coronavirus has created unprecedented financial and societal disruption,” Goldman Sachs strategist David Kostin and colleagues wrote in a note Friday. “We have cut our EPS [earnings-per-share] forecast twice in two weeks. Every investor asks ‘What is the floor for stocks?’”

That’s tough to say, given how volatile the market has been, they say. Counting Monday, the Dow Jones Industrial Average saw its third-straight move of 9% or more—something that hasn’t happened since October 1929. But based on their estimates that take into account the Federal Reserve model, a Dividend Discount Model, and history, their model predicts a mid-year trough of 2000 for the S&P 500 index.

On a more positive note, the Goldman Sachs team points out event-driven bear markets often bring out sharp rebounds. The strategists expect the S&P 500 index to end the year at 3200—a hair lower than where it was at the end of 2020.

“The lesson of prior event-driven bear markets is that financial devastation ultimately allows a new bull market to be born,” they wrote. “Consider the one-month decline of 19% sparked by the 1998 Russian sovereign debt default that was followed by a 28% rally during the subsequent six months. Or the 19% drop in 2020 during the Eurozone debt crisis that was followed by a 29% rebound in six months.”

## What Does the S&P 500 Index Measure and How Is It Calculated?

The S&P 500 measures the value of the stocks of the 500 largest corporations by market capitalization listed on the New York Stock Exchange or Nasdaq Composite. The intention of Standard & Poor’s is to have a price that provides a quick look at the stock market and economy. Indeed, the S&P 500 index is the most popular measure used by financial media and professionals, while the mainstream media and the general public might be more familiar with the Dow Jones Industrial Average.

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The S&P 500 index is a float-adjusted market-cap weighted index. It’s calculated by taking the sum of the adjusted market capitalization of all S&P 500 stocks and then dividing it with an index divisor, which is a proprietary figure developed by Standard & Poor’s.

Being float-adjusted, the index is continuously recalculated based on the shares trading. The divisor is adjusted when there are stock splits, special dividends, or spinoffs that could affect the value of the index. The divisor ensures that these non-economic factors do not affect the index.

The index is calculated as follows:

S & P 5 0 0 I n d e x = Market Cap for All S&P 500 Stocks Index Divisor

Index = \dfrac<\text><\text> S & P 5 0 0 I n d e x = Index Divisor Market Cap for All S&P 500 Stocks ​

## S&P 500 Pitfalls

One result of this methodology is that the index is weighted toward larger-cap companies.

For example, on Dec. 17, 2020, the largest component was Microsoft at $802 billion. Compare that to the likes of Adobe, which has a$110 billion market cap. The total market capitalization of all the companies in the index was $23.3 trillion. The weighted average market capitalization of each individual component is then determined by dividing the market capitalization of the individual component by$23.3 trillion. Microsoft’s weighting is determined by taking its market capitalization and dividing it by the total index market cap.

The formula for determining this weighting is as follows:

Therefore, using the same example, Microsoft has a 3.4% weighting, while a smaller company like Adobe has a 0.5% weighting in the index. This leads to the mega-cap stocks having an outsized impact on the index. Sometimes, this index structure can mask strength or weakness in smaller companies if larger-cap companies are diverging. In other ways, this index structure better represents the overall economy than indexes in which weighting is determined by an equal share or an index that is price weighted.

## S&P 500 Positives

The S&P 500 is considered an effective representation for the economy due to its inclusion of around 500 companies, which covers all areas of the United States and across all industries. In contrast, the Dow Jones Industrial Average (DJIA) is comprised of 30 companies, leading to a more narrow reflection. Further, the DJIA is a price-weighted index, so the largest weighted components are determined by its stock price rather than some fundamental measure.

The S&P 500 is a broader representation, having more stocks and covering every industry. The DJIA is limited and the movement of a stock in the DJIA can have a greater impact than that of the S&P 500. The largest weighted stock in the S&P 500 likely has a smaller weighting than the largest weighted stock in the DJIA. The movement of a few companies can have a profound impact on the DJIA.

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