Wall Street Warns S&P 500 Dip Buyers of More Turbulence Ahead

“We don’t think it is entirely over,” said Julian Emanuel, chief equity and quantitative strategist at Evercore ISI, referring to Friday’s selloff. Although his team believes a meeting between Trump and Chinese leader Xi Jinping will occur at the end of the month as the White House indicated, “the heightened uncertainty and increased volatility is likely to cause degrossing from active managers — particularly systematic funds.”

Read: Stock Buyers Power Best S&P 500 Rally Since August: Markets Wrap

The spat around rare earth minerals on Friday was “a catalyst for an overdue pullback,” he said, adding that a rally of as much as 36% from an April low made the S&P 500 overbought. “September and October never fail to become volatile, year in and year out.”

Support Line

From a technical standpoint, Friday’s selloff saw the S&P 500 retreat to an important trendline support level, according to Mark Newton, global head of technical strategy at Fundstrat Global Advisors. From here, a 5% pullback is possible and would be healthy for US equities ahead of a further push higher into the end of the year, he added.

As the S&P 500 clocked its worst day since April on Friday, options traders evinced few signs of panic, leaving scope for them to be caught offsides in the face of renewed trade jitters. The Cboe VIX Index, which closed at 21.66 last week, remained at fairly “pedestrian levels” by historical standards, said Mandy Xu, head of derivatives market intelligence at Cboe Global Markets Inc. While appetite for crash insurance was subtle, demand for the so-called right-tail hedges went up, she added.

To Thomas Thornton, founder of Hedge Fund Telemetry, the risk is that computer-based strategies, hedge funds and mom-and-pop investors have all crowded into the same megacap tech stocks, raising the possibility of a painful reversal should sentiment sour on the group. Ballooning assets of leveraged exchange-traded funds is another potential risk, he said.

“Sentiment remains elevated with investors complacent,” Thornton said. “The risk of something dangerous happening in the market remains very high.”

--With assistance from Matt Turner.

(Updates with Tuesday’s trading in second paragraph.)