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Bank of America warns of a hard landing if the S&P 500 falls below the 200-day moving average.
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If the stock market falls below that threshold, a 10% correction could occur, BofA said.
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Key sectors such as semiconductors and Big Tech need to hold their support levels to avoid further declines.
Investors can expect a hard landing for the economy if the S&P 500 falls below a key technical level, according to a note Thursday from Bank of America strategist Michael Hartnett.
Hartnett cited the S&P 500’s 200-day moving average as a key boundary that indicates whether the economy is headed for a deeper downturn.
“Technical levels that would turn the Wall Street narrative from a soft to a hard landing have not been broken… 4% on 30-year Treasury, 400bps on HY CDX, 5050 on S&P 500,” Hartnett said.
The 5,050 level on the S&P 500 corresponds to the index’s rising 200-day moving average. On Friday, the S&P 500 was trading at 5,317, or about 6% above its 200-day moving average.
“It is now important for stock market leaders SOX (4600) and big tech companies XLK (200) to hold the 200dma levels… if the levels break, traders will target highs in 2021 (i.e. 10% lower),” Hartnett said.
The SOX Semiconductor Index and the XLK ETF both tested their 200-day moving averages as technical support levels amid increased market volatility earlier this week, before rebounding higher.
Although key technical support levels in the stock market have not yet been broken, Hartnett is cautious about his outlook for the US economy and the stock market.
For a soft landing, many things have to go right. For example, the Federal Reserve has to lower interest rates, which in turn leads to more positive investor sentiment.
But price developments in certain parts of the stock market are not encouraging, Hartnett said.
“The price performance in biotech (stocks with the longest duration) is not favorable and US retail stocks (consumer staples at a relatively low level in 12 years) are not rising yet,” Hartnett said.
Hartnett is sticking to his strategy of selling stocks after the Fed makes its first rate cut, which is expected to happen at its policy meeting next month.
“We remain in the ‘sell the first one you see,’” Hartnett said, adding that he sees growing risks in AI-related stocks as they scramble to find returns on their massive GPU spending.
Read the original article on Business Insider
