S&P 500: Why This 'Pullback' Will Likely Continue

Summary

• The S&P 500/SPX just had a pullback of 7%. However, the selling is probably not over just yet.
• The Nasdaq corrected by around 5.5%, but if a crucial technical level is breached, the correction could be around 12%-13%.
• The VIX illustrates that many market participants became extremely complacent and were caught off guard by the violent selloff.
• Other assets to consider while stocks take a breather.
• This idea was discussed in more depth with members of my private investing community, Albright Investment Group . Get started today »

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The S&P 500/SPX (SP500) had corrected by 7% before catching a substantial bid in the overnight session. Yesterday's panic-driven selling pushed prices to critical resistance levels in various sectors.

S&P Futures

Source: Think or Swim

SPX and stocks in general are at a major inflection point here. The SPX corrected nicely, right down to the 3K support level. Yesterday's extreme selling may have been an overreaction to recent news and may represent a short- to intermediate-term buying opportunity in certain sectors.

We are watching the 3,000 - 2,990 for support now, and looking at 3,100 as initial resistance. If SPX breaks out above 3,100 it could possibly fill the gap up to 3,200 quite quickly. Only once this happens, will we see whether this rally can be sustained.

Let Us Look at The Nasdaq

The Nasdaq had a 5%-6% correction from peak to trough, but it may not be over yet. I would remain cautious around these levels as it's not yet clear if the market has bottomed.

Nasdaq rebounded nicely from 9,600 support. However, if the Nasdaq rolls over and 9,600 gets breached, I expect a pullback to the 9,000 level is very possible. This would be an additional 6.25% decline, bringing total peak to trough declines to roughly 12%-13% in the Nasdaq composite. Incidentally, this is roughly in line with SPX's potential drop to the 2,850 point if the current pullback continues.

So, Why the Selling?

The DJIA gave up a remarkable 1,800 points, while the VIX skyrocketed by 52%. Is this the time to panic?

I think not, as much of the panic already occurred yesterday. This was likely a technical-driven selloff due to markets appreciating extremely rapidly. An important factor to consider is that the Fed remains committed to injecting massive capital into markets. This capital that's flooding the financial system will need to go somewhere, and this phenomenon is likely to result in higher asset prices across the board.

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Nevertheless, just as trees can't grow to the sky, pullbacks and corrections should be expected in any market, especially in an extremely volatile one such as this one.

So, which assets are going to benefit most?

Naturally, we continue to like the GSM sector as gold and silver mining companies are likely to make much more money due to higher gold and silver prices in the future. The Fed's perpetually monetary expansion could enable assets like gold, silver, Bitcoin and other inflation-resistant digital assets to appreciate substantially going forward.

What about stocks?

Most non-GSM stocks appear riskier right now as there's enormous uncertainty surrounding future earnings, revenue growth, and economic growth in general going forward. Another factor to consider is that many stocks and sectors moved up by 50% or more since the mid-March lows.

Gold Looks Very Attractive Here

We can see that gold continues to do very well. It has been in a consolidating range for about 2.5 months now. I believe that gold will very likely breakout to new ATHs relatively soon, before year-end, in my view.

Continuous expansion of the Fed's balance sheet and the U.S.'s monetary base should lead to much higher gold prices within the next few years. Also, due to the rapid expansion of the Fed's balance sheet, gold may appreciate rather quickly, possibly reaching $2,500-3,000 or higher in 2021.

A Look at the VIX

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The market simply got far too complacent in my view. A lot of market participants have to be caught off guard for the VIX to skyrocket by 52% in one day. It's important to keep an eye on the VIX as it illustrates levels of fear and anxiety in the market. If the correction resumes, we will likely see a top at around 50-55 in the VIX. This could coincide with roughly SPX 2.850.

However, I do not envision the VIX going back up to 80 again, at least not any time soon.

Analyst’s Disclosure: I am/we are long A DIVERSIFIED PORTFOLIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article expresses solely my opinions, is produced for informational purposes only and is not a recommendation to buy or sell any securities. Please always conduct your own research before making any investment decisions.