The S&P 500 Just Dropped 10%. Now What?

The S&P 500 has officially entered correction territory, and if you listen closely, you can almost hear the collective groan of traders, analysts, and that one cousin who just started investing and won’t stop talking about “buying the dip” in between bouts of crypto hype and steroids. The big question now: Is this the beginning of something much worse, or are we on the brink of a classic, textbook bounce?

What about the numbers? What do they tell us? What about the history, and—because it’s always relevant—the blind, sometimes irrational hope that keeps markets afloat? What do they say?

Corrections Happen. Get Over It.

First things first: a 10% drop isn’t the end of the world. If you lost 10% of your toes, you could still be a good runner. Historically, the S&P 500 has taken this kind of hit about every two years, like clockwork. Sometimes it’s triggered by inflation, sometimes by geopolitical chaos, and sometimes by nothing more than the market collectively waking up and realizing, “Hold up. Are we overpaying for everything?”

Like jellyfish stings, the vast majority of these events don’t turn into full-blown chaos. Since 1950, the index has dropped 10% or more dozens of times, and in most cases, it’s rebounded just fine. The average return three months after a correction? Around 2%. After six months? Closer to 5%. And after a year? About 15%. Not too shabby, considering the accompanying panic.

But (as my tailor likes to say, there’s always a but) there have been exceptions. Every so often, a correction snowballs into something uglier. Case in point: 2000 (dot-com bust), 2008 (financial apocalypse), and 2022 (inflation eating everything in sight). So, is this time different?

Technical Indicators: The Market Is Flirting With Disaster

If you’re the kind of person who gets excited by charts, moving averages, and fibonacci levels (oh my!), congratulations—you probably saw this coming. The S&P 500 just slipped below its 200-day moving average, which is the technical analysis equivalent of hearing the cat playing around downstairs at midnight again and then realizing you don’t have a cat. It spells trouble with a capital 200.

That said, momentum indicators like RSI suggest the market is oversold. Historically, when the RSI drops to these levels, the market tends to bounce within a few weeks.

The big question is whether that bounce has staying power—or if it’s just a cruel head fake before another leg down. Support levels (i.e., the places where buyers historically show up to prevent things from getting worse) suggest we could see a short-term floor around 5,400. If that breaks? Strap in. The next key level is around 5,265, and below that, you might want to start stress-baking.

Macroeconomics: The Ultimate Wild Card

While technical indicators are helpful, they don’t exist in a vacuum. The broader economic picture matters, and right now, things are—how do I put this gently?—an absolute cluster$%&…

For starters, interest rates are still uncomfortably high. The Federal Reserve has been playing chicken with inflation, and while rate hikes have cooled things down, they’ve also made borrowing money prohibitively expensive. That’s a problem when the entire stock market has been propped up for a decade by easy money, exorbitant amounts of debt, and the creation of insane amounts of cash.

And then there’s the ongoing circus of trade wars, political uncertainty, and the ever-looming question of whether AI stocks are actually worth their absurd valuations. If you’re hoping for a smooth and easy recovery, good luck with that.

Investor Sentiment: Panic Now or Panic Later?

The market tends to be psychologically contrarian. When investors get too optimistic, stocks tend to disappoint. And when everyone is convinced the world is falling apart, markets tend to bounce. I have (anecdotally) spoken to hundreds of traders and investors recently that are champing at the bit to buy this dip. To me that’s an indication that markets are not healthy and this “dip” is the first leg down, not the last.

That said, the market needs an actual catalyst to rally. That could come in the form of better-than-expected earnings, a softer stance from the Fed, or just a good old-fashioned bout of FOMO from investors who realize they panic-sold at the bottom.

Will We, Won’t We?

In the short term, a bounce is statistically likely, but the simple statistics don’t capture all the variables in the equation. The historical probability numbers suggest we could see a recovery over the next few weeks. But the real question is whether that bounce will hold—or if we’re looking at more poo on the fan

Disclosure: I am short SPX