S&P 500 Index to move back to the 200-DMA at 3125 as the correction is not over – Morgan Stanley

Financial markets have been trading in a wide range since August. For example, US equity markets have not been able to make new highs in six weeks, the longest period since this new bull market began in March. Uncertainty about fiscal stimulus, the US election and the pandemic could mean the correction isn’t over, according to Mike Wilson, Chief Investment Officer and Chief US Equity Strategist at Morgan Stanley.

Key quotes

“From a technical perspective, I've been closely watching a key resistance area for the S&P 500 since early September. And that comes in around 3550. Last week, the index failed to break through that level for the second time in two months. This technical failure is not the end of the bull market, but it does suggest to me that the correction that began in September probably is incomplete. In short, that means equity markets could experience another 10% correction back toward more formidable support levels. More specifically, the 200-day moving average, which comes in around 3125.”

“At today's prices, the S&P 500 is trading at an equity risk premium of 380 basis points. That's fair, but a full level based on the current volatility of equity markets, which is slightly higher than average. However, with so much uncertainty surrounding the US elections, Brexit and the arriving second wave of COVID-19, we think the equity risk premium should be about 10% higher. In short, we like our 3100-3550 range on the S&P 500 as a good guide for risk taking, both from a technical and valuation perspective.”