The benchmark Standard & Poor’s 500 closed below its 200-day moving average – a measure of the market’s long-term trend – on Thursday for the first time in five months, and ended below it again on Friday. More than half of the Dow components are trading below key technical levels.
“I don’t think you have to panic here, but I think you really want to be looking for the market to move lower for the next couple of months,” said Frank Gretz, a market analyst and technician for Wellington Shields & Co, a brokerage in New York. “I think the next rally is the rally you want to sell.”
At the heart of the market’s worry is whether US leaders can come to agreement on some $600bn (£377bn) in spending cuts and tax increases that are due to kick in early next year. Some fear dramatic cutbacks could send the US economy into another recession.
The prospect of higher tax rates in 2013 is driving investors to sell shares as they seek to decrease the tax impact from their positions this year and next.
The S&P 500 fell 2.4 per cent for the week, its worst weekly percentage drop since June. The index is now down 6.4 per cent from its intraday high for the year of 1,474.51 reached on 14 September. That drop puts the benchmark index below its 50-day moving average, but not yet into correction territory, defined as a 10 per cent drop from a peak.