Bridgewater’s Ray Dalio made some stark comments this morning about the state of the stock market.
Dalio is the founder and co-chief investment officer of Bridgewater Associates, the world’s largest hedge fund manager.
Among his comments, Dalio said inflation will stay above what people and the Federal Reserve want, saying “my guess is it’s going to be 4.5% to 5% over the long term, excluding shocks.”
If that stops and rates rise — as expected — Dalio says stock prices could drop another 20%.
Interest rate hike bets have been rising since the monthly inflation report came in higher than expected earlier this week.
Dalio is a respected investor who has his finger on the pulse of many markets. While that doesn’t mean we’re guaranteed to see a 20% drop, it does mean we have to exercise some caution here.
Let’s look at what the graphs tell us now.
The daily chart above is not inspiring.
SPDR S&P 500 ETF Trust (spy) It was a disastrous day on Tuesday, dropping more than 4%. This was the worst session for the S&P 500 since June 2020.
At the moment, the area is holding $390, which is above last week’s low of $388.42.
But SPY has a two-day low of $391.12, which is the lowest level of yesterday’s somewhat pathetic rebound after the beating the index took on Tuesday.
I say these things not to create fear but simply to remind traders that stocks are in a bear market and are swinging at support.
Could this support hold up and rotate up? Yes, it is possible – but not likely.
If the spy manages to clear $396.20 and close above it, we could see a push back to $400 or higher (for the S&P this is close to $4,000).
As for what happens when a break below $388.42 – last week’s low – opens the gap-filling level lower near $379. Just below that area, a zone between $372.50 and $375 becomes a possibility.
Where can stocks fall?
Zooming out a bit with the weekly chart, we have an area that I’ve circled on my charts for months. this, no Not It means we will necessarily get there. And if we get there, we’ve got it Not It necessarily means that it will be low or that it will hold as support.
As traders, we must keep an open mind and adapt to the market.
If the $390 area retracts, the $350 area will start to really grab one’s attention. In that region we find:
- 50-month and 200-week moving averages
- 50% correction from all-time high to Covid bottom
- Monthly VWAP measurement
- Breakout Zone for 2020
Once again, there is no guarantee that we will retest the current 2022 low near $362 or that if we do, we will test that area of interest I just mentioned. But it should be a potential outcome that traders should note.
For what it’s worth, a test of the $350 area would have us down 11% from yesterday’s close.
If we’re talking about a 20% drop from current levels, that puts us around $315 on the spy.
Interestingly enough, this would put us near the 61.8% retracement level, but about 34% below the all-time high.