Market participants are starting to doubt the high earnings growth projections placed on the “Magnificent 7” stocks, including Apple, Amazon, Microsoft, Nvidia, Tesla, Alphabet, and Meta. The recent record low implied correlation among S&P 500 component stocks could lead to a significant spike in the VIX, signaling a potential medium-term corrective decline phase that may trigger a global risk-off scenario.

Yesterday, the US stock market witnessed a massive sell-off, with the Magnificent 7 cohort shedding close to US$760 billion in market capitalization in a single day. The S&P 500, which has the highest weightage of these stocks, experienced its worst daily performance since 2022, following a bearish breakdown below a key support level.

The weakness in the higher beta Nasdaq 100 has also had a negative impact on the broader market, with the S&P 500 recording its worst daily performance in years. Even outperformers like the Russell 2000 and Dow Jones Industrial Average were not immune to the sell-off, as they also saw significant losses.

Implied Low Correlation and Volatility Could Lead to Further Market Turbulence

The recent plunge in the VIX, along with a decline in the implied correlation index of S&P 500 constituents, has raised concerns among market participants. The low correlation readings among stocks have led to outsized gains in the Magnificent 7, creating a sense of complacency in the market.

If the earnings reports of the other Magnificent 7 stocks disappoint, we could see a further spike in the VIX, triggering a medium-term corrective decline in the S&P 500 and potentially impacting global stock indices.

S&P 500 Faces Potential Breakdown

Based on current price actions, the S&P 500 is at risk of breaking below its 50-day moving average and entering a corrective decline phase. The medium-term momentum has turned bearish, suggesting that the uptrend since October 2023 may be coming to an end.

A break below key support levels could lead to further declines, while a clearance above a pivotal resistance level could signal a return to bullish momentum.

In conclusion, the recent sell-off in the Magnificent 7 stocks and the potential breakdown in the S&P 500 could signal a broader market correction. Investors should closely monitor earnings reports and market trends to navigate potential risks and opportunities in the coming weeks.

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