Last week's selloff did not cause widespread technical damage
“With Friday’s close at 6,388, the index might be considered in ‘no-man’s’ land, with respect to the first area of support nearly 200 points below Friday’s close. That support area is defined by 6,144 (its former all-time closing high in February) and 6,193, which is the site of the rising 30-day moving average (projected to be at 6,248 by this week’s end)… For what it is worth, the SPX has not experienced a convincing close below its 10-day moving average since June 20. This trendline comes into the week sitting at 6,310 and is projected to be at 6,363 this coming Friday. A solid close beneath this moving average could indicate slowing momentum relative to the momentum we have seen since the June 24 gap higher.”
-Monday Morning Outlook, July 28, 2025
Because the S&P 500 Index (SPX—6,238.01) advanced with little to no drawdown since the mid-June breakout above its previous all-time high in February, it was just a matter of time before the impressive short-term momentum would subside.
That time came late last week, beginning with a near bearish “outside day” candle on Thursday, even as the index achieved another intraday all-time high at 6,427 (bullish outside days have preceded bullish price action in 2025 in the near term). The Thursday intraday high was just 42 points below the 6,469 level that is exactly 10% above its 2024 close. I opened in early July -- and reiterated last week -- that this level or area could present a hesitation or pivot point.
The bearish candle on Thursday preceded Friday’s gap lower (the first major gap lower since early April, when President Donald Trump rolled out his tariffs to the world). The Friday gap was driven by the Aug. 1 tariff deadline, where most levies saw lower than previously suggested rates, compared to Trump's early April threats. Also contributing to the selloff was disappointing employment data released Friday morning, on the heels of sticky inflation data earlier in the week (making for a difficult situation for Federal Reserve Chairman Powell). Plus, a negative earnings reaction from mega-cap technology stock Amazon.com (AMZN) sent shares into the red this year.
Additionally, the SPX experienced its first close below its 10-day moving average since June 20. This was our quantified method of declaring that the short-term momentum since June met its end, with the index trading back to levels last seen in early July and Friday’s decline wiping out nearly three weeks of gains.
Meanwhile, volatility expectations, as measured by the Cboe Volatility Index (VIX—20.38), shot up nearly 50% from last week’s multi-month low. The VIX high on Friday was just below the closing highs of 22.29 on May and 22.17 in June that marked short-term troughs. A risk for bulls is that the SPX closed below the 30-day moving average, albeit barely.
A risk to bears is another VIX peak in the vicinity of 22.00. But a close above the May and June closing highs enhances the odds of a move down to the next level of potential support in the 6,130-6-144 area, the former of which is the 50-day moving average and the latter of which is the previous all-time closing high in February.
With respect to the VIX pop last week, and something I regrettably missed until after the fact, is that the level of calls bought (to open) on VIX futures contracts relative to puts bought (to open) in the previous 20 days hit a ratio of four. Historically, an extreme like this proves to be smart money, as it tends to precede VIX pops in the near term. This time was no different.
My commentary last week dispelled the notion that there is widespread euphoria on stocks, which could limit drawdown if there was a burst of fund flows into domestic equities and active fund managers 100% invested.
In fact, fund flows, short interest figures and active investment managers reducing exposure to the market the past few week indicate caution. And if you are in tune with why such caution persists, it relates to tariffs, valuations and, more recently, negative seasonality in August and September.
From a short-term perspective, the outlook hasn’t changed, with risk and reward about the same – the most recent closing high is 150 points overhead and support in the 6,130-6,144 zone is just over 100 points below Friday’s close. Even as momentum since the June breakout has disappeared, there is not widespread technical damage that might cause an investor to reassess.
But if the sudden loss of momentum is enough to make you wary amid the weak seasonality, plus the tariff and Fed uncertainty after worse-than-expected employment data and continued sticky inflation, a hedge to your long positions through year end might be worth it, as portfolio protection could become even more expensive if technical damage lies ahead.
The market clearly didn’t like the prospect of tariffs in April. With the tariff deadline now done and dusted as of Friday, we will find out soon enough if it was tariffs alone that investors didn’t like, or the higher introductory tariff rates that the President threatened in April that spooked investors.
Todd Salamone is Schaeffer's Senior V.P. of Research
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