The Vanguard S&P 500 Index (VOO) and the SPDR S&P 500 Index (SPY) ETFs have surged this month and are hovering at their all-time highs, helped by the ongoing demand for equities ahead of the US inflation data. The VOO ETF is trading at $600 while the SPY was trading at $650.
VOO ETF stock price analysis points to a retreat
A keener technical analysis shows that the VOO and SPY ETDs could be on the cusp of a pullback in the coming weeks.
The chart below shows that the VOO ETF has formed the rising wedge pattern, which comprises of two ascending and converging trendlines. The two lines of this pattern are now nearing their confluence, pointing to a pullback.
Further, the ETF is yet to retest the important support level at $560, its highest level in February. It is common for an asset to retest a crucial support after making a bullish breakout. This situation is known as a break-and-retest pattern and is one of the most common continuation signs in technical analysis.
The VOO ETF remains much higher than the 100-day and 200-day Exponential Moving Averages (EMA), which are at $533 and $542, respectively. In most cases, an asset will always go through a process known as a mean reversion, where it retreats these moving averages.
Meanwhile, the Relative Strength Index (RSI) and the MACD indicators have been moving downwards in the past few months even as the VOO ETF climbed. This performance is known as a bearish divergence and is a common sign of a reversal.
Therefore, the ETF will likely retreat in the next few weeks, potentially to the important support level at $560 and then resume the uptrend.
Pullbacks are common with the S&P 500 Index. For example, in April, it plunged from a high of $560 to a low of $442, a 21% plunge. This decline happened after Donald Trump launched his tariffs.
VOO ETF stock | Source: TradingView
Why the S&P 500 Index may retreat
Fundamentally, there are three main reasons why the S&P 500 Index and its ETFs may retreat in the near term.
First, there is the concept known as buying the rumor and selling the news. In this, the S&P 500 Index has surged as investors anticipate a Federal Reserve interest rate cut in the next meeting.
This cut will definitely happen as the US has published weak jobs numbers. A report on Tuesday showed that the number of Americans on payrolls was 911,000 lower than expected. Similarly, the official nonfarm farm payroll data shows that the economy created just 22,000 jobs in August as the unemployment rate rose to 4.3%.
Therefore, the Federal Reserve will cut rates to help prevent further deterioration of the labor market. We expect the rate cut to be hawkish as the economy is going through a stagflation period.
Stagflation, which is the Federal Reserve’s worst nightmare, happens when the economy is slowing and inflation is rising. Economists expect the upcoming data to show that the headline Consumer Price Index rose to 3% in August.
The other potential risk for the VOO and SPY ETFs is that the inflows from American and international investors to its funds is slowing, which is a sign of buyers fatigue. For example, the VOO ETF had a $104 million outflow last week. RBC analysts said:
“When we zoom out, we think this is evidence of buyers’ fatigue. Importantly, within US equity funds retail flows have faltered recently.”
Finally, there is a risk that the artificial intelligence industry, which has boosted the stock market, is slowing. In a recent statement, NVIDIA confirmed that its business was not growing at a faster pace than initially expected. This is a major headwind as most of the recent S&P 500 gains have been attributed to the AI tailwind.
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