Evergrande crisis triggers this short-term stock market sell signal

The financial crisis gripping major Chinese property developer Evergrande has triggered a sharp turn in broader stock market sentiment, as seen by the S&P 500 dropping below its key 50-day moving average.

With news of the Evergrande debacle gaining steam last Friday, the S&P 500 closed the session below the 50-day moving average for the first time since June. The tenuous situation of Evergrande — which includes potential missed debt repayments — gained steam over the weekend and caused investors to awaken to a global risk rout on Monday. In turn, the S&P 500 fell further below the 50-day moving average midway through Monday's session (see chart below).

Miller Tabak strategist Matt Maley points out the S&P 500 dropped below the 50-day moving average on one trading day back in March of this year. It quickly bounced back as investors embraced the re-acceleration in corporate profits from the depths of the COVID-19 pandemic and ongoing easy policies from the Federal Reserve.

But given fresh concerns facing investors around the debt ceiling, Evergrande, and the direction of Fed policy (meeting on tap this week) a test of the 100-day moving average (which is less than 1% away from current levels) could be in the cards.

Key technical levels for the S&P 500 have now come into play thanks to spate of negative headlines.

If that important technical level is breached for the S&P 500, strategists argue it could be look out below for stocks in the near-term.

Says Maley, “The 100-DMA [day moving average] provided nice support for the S&P 500 back in both September and October of last year. Therefore, it might be able to slow any slide before things start to get ugly. Having said this, a break of that 100-DMA would confirm the break-down in the stock market… and it would signal that a test of the 200-DMA (down at 4,100) is all but certain.”

According to Yahoo Finance Plus data, the 200-day average is only 5.8% away from being tested.

Other traders are taking a more hopeful position on the markets even as they exhibit their first true test of volatility in some time. The bulls appear to agree that while short-term pressure in markets is possible due to the litany of headline risks, the fundamentals are such that stocks could rally into year-end.

“I think you could watch for the pullback. But I think by the end of the year, this will be just a blip along the way,” said Baird strategist Michael Antonelli on Yahoo Finance Live. “In order for you to think this is super bad, you are going to have to make the case why this impacts, Visa, Google and Facebook earnings in a meaningful way that we have some 15% to 20% draw-down [correction].”

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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