S&P 500 Tops Out, Signaling Major Economic Downturn

S&P 500 Tops Out, Signaling Major Economic Downturn

Veteran trader Gareth Saloway warns that the stock market may have reached a multi-year peak, potentially heralding a significant economic contraction similar to the Great Depression. Saloway, with two decades of market experience, points to specific chart patterns and economic indicators suggesting a coming collapse that could impact all asset classes, including Bitcoin.

Market Analysis: A Rounded Top in the S&P 500

Saloway’s analysis focuses on the S&P 500 index, highlighting a parallel channel that has guided market movements since the COVID-19 pandemic. He observes that the index has formed a rounded top pattern, a technical signal often indicating that buyer momentum is weakening and institutional investors are selling into retail demand. This pattern suggests that the market may have already topped and is preparing for a substantial decline.

“What we’ve been in since COVID has been this upward parallel,” Saloway explained, referring to the S&P 500 chart. “Every low that the markets made… lines perfectly with a trend line and then you have this parallel trend line. If we just extend this parallel to the bull market highs of 2021 on the S&P, look at what we tagged in October and what we’ve been kind of creating this rounded top pattern and then we started to roll over.”

He believes this rounded top signifies that while the narrative remains bullish, institutions are offloading assets. Retail investors, still optimistic, are buying into this selling pressure. Eventually, retail investors will run out of capital, leading to a significant downturn.

Economic Weakness and Debt Concerns

The trader links this market outlook to underlying economic weaknesses. He points to the private credit markets already showing signs of stress and a labor market with stagnant or negative job growth. Even recent positive jobs reports are met with skepticism, as historical data suggests they may be revised downwards significantly.

“I think the market thesis is… the economy is a lot weaker than people are showing in the data, at least the initial data,” Saloway stated. “And you’re seeing it in the consumers too. Everyone that’s not in the stock market is struggling with inflation and they’re not doing better, they’re doing worse.”

Adding to these concerns is the escalating U.S. national debt, which has surpassed $39 trillion and is growing rapidly. Saloway fears that this unsustainable debt level could lead to other countries reducing their holdings of U.S. debt or interest rates rising so high they bankrupt the nation. This, he suggests, could trigger a debt blowup starting in private credit markets and spreading to real estate.

Potential Market Correction and Historical Parallels

Saloway forecasts a potential 20% correction in the S&P 500 by the end of the year or early 2027, describing it as his base case scenario. However, he warns that this could be just the beginning of a larger economic downturn, drawing parallels to the period before the Great Depression.

He contrasts the current situation with the 2022 bear market, where the S&P 500 saw a roughly 27% drop. In 2022, the Federal Reserve had more flexibility to lower interest rates. Today, however, persistent inflation, exacerbated by surging oil prices, complicates the Fed’s ability to stimulate the economy. If inflation remains high, it could render the Federal Reserve ineffective and lead to stagflation, where economic growth stalls while prices rise.

“At some point if we have persistent inflation, not only do you get stagflation, but you also make the Federal Reserve obsolete,” Saloway cautioned. “They can’t do what they always do to essentially stimulate the economy.”

Bitcoin’s Role and Future Outlook

Despite his bearish outlook on traditional markets, Saloway remains bullish on Bitcoin in the long term. He sees Bitcoin potentially acting as a digital safe-haven asset, diverging from risk assets like stocks.

“I continue to be a bull on Bitcoin longer term. I want to be totally clear on that,” he affirmed. “I still think Bitcoin is in a good position.”

Saloway identifies key technical levels for Bitcoin, with $62,750 serving as a crucial marker. Staying above this level suggests a bullish short-term outlook, potentially leading to $80,000-$85,000. However, he acknowledges that a broader economic collapse could still pull Bitcoin down, possibly to the $30,000 range in a worst-case scenario over the next 6-12 months.

Looking further ahead, Saloway believes that Bitcoin could eventually break away from the S&P 500’s performance. Even if the stock market remains depressed, Bitcoin might reach new all-time highs, functioning as a digital store of value. For the next bull market cycle, he projects a potential price target of $150,000-$160,000 based on historical trend lines.

Alternative Assets and Investment Strategies

When considering other assets, Saloway expresses caution about oil, believing it is topping out and could fall significantly due to a weaker global economy and potential supply increases. He favors gold as a potential safe haven, though he anticipates a temporary dip to $3,500 before potential recovery.

He also suggests looking at beaten-down, quality stocks with high dividend yields, as these are often overlooked during market downturns but can offer stability and potential upside. U.S. Treasuries are also seen as a viable option, especially if interest rates fall, offering a safer return compared to riskier assets.

“I think we’re reverting back to the de-risking and really people shying away from those type of assets,” Saloway concluded. “So, you’ll get the dividend plus a big move up in some of these names. And yes, I do think rates will eventually come down, which will make treasuries much more conducive to owning.”

Source: Bitcoin Holders – What’s Coming is Worse Than 1929 Depression (YouTube)