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Investing.com -- Societe Generale’s chief global strategist Albert Edwards warns that the S&P 500 is “at a critical level” as the index hovers around its 200-day moving average (MA).
“Nothing good happens below the 200-day moving average,” Edwards highlighted a famous quote by legendary trader Paul Tudor Jones in a Thursday note.
Edwards recalls that when the S&P 500 dropped below this key technical indicator in early March, investor anxiety surged markedly, accompanied by rising recession fears.
The market then staged a rally from the March 13 low of 5,500, but Edwards cautions that this rebound to just above the 200-day MA “may prove to be only a technical rally from very oversold levels.”
“If the market fails to hold the 200d MA you can expect recession chatter to quickly resurface,” the strategist added.
He cautions that technical analysts are likely to turn bearish if the index fails to decisively recover above this critical level. “Buy the S&P when it is below the 200-day moving average at your peril,” he warns.
The benchmark stock market index has seen its momentum weaken, and the market is now attempting to regain strength above the 200-day MA.
Beyond technical factors, Edwards points to deteriorating corporate profits as a fundamental reason for weakness in the equity market.
A key factor is the declining U.S. corporate profits optimism, which could add further downward pressure on equities.
Edwards also raises concern over the potential for a broader economic slowdown, driven by weakening consumer spending.
He cites data from VantageScore’s CEO Silvio Tavares, who noted on CNBC’s Squawk Box that “the delinquency rate has more than doubled recently for people earning more than $150,000 a year — much faster than for poorer households.”
A prolonged bear market could erode the wealth effect that has been a key driver of post-pandemic economic expansion, Edwards warns, further weakening consumer spending and the overall economy.