The S&P 500 could face its biggest drop since April this week following an expected Fed rate cut

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With a Federal Reserve interest rate cut widely expected, stocks are facing a potential “sell-the-news” moment, which could spark the biggest pullback since April for the S&P 500.

That’s according to Jonathan Krinsky, BTIG’s chief market technician, who said that 6,400 has been his “line in the sand,” above which bulls are maintaining control of the market. The S&P 500 SPX logged its 24th record close last week, and is up nearly 12% this year.

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“The issue is now that a pullback to 6,400 would be [approximately] 3% off the highs, which would represent the biggest pullback since April. While that would do nothing to alter the preliminary trend and momentum of the market, it would likely feel uncomfortable to many who have enjoyed a smooth five-month uptrend,” Krinsky said in a Sunday note.BTIG/Bloomberg -

Over the past 20 years, he said, 2006 and 2017 were the only two in which stocks sidestepped a pullback of at least 4% in the last five months of the year. “With the widely anticipated FOMC this week, a ‘sell the news’ setup as we head into the worst seasonal stretch of the year is a highly likely scenario, in our view,” he said.

Read:A divided Fed is expected to settle on a 25-basis-point rate cut this week. The key question is, what comes next?

JPMorgan traders offered similar caution last week, saying this week’s Fed meeting, largely expected to deliver a 25-basis-point interest-rate cut, “could turn into a ‘sell the news’ event as investors pullback to consider macro data, Fed’s reaction function, potentially stretched positioning, a weaker corporate buyback bid, and waning participation from the retail investor.”

BTIG’s Krinsky added that September marks the weakest part of the calendar year, with 16 of the past 20 years seeing a 4% or bigger pullback in the month. Of the two years that didn’t, 7% to 10% drops were seen in August, he said.-

The Kobeissi Letter’s Adam Kobeissi told clients in a Sunday newsletter that a 25 basis-point cut by the Fed is now “fully priced-in, and will likely become a short term ‘sell the news’ event,” but that will eventually drive a move toward 6,700.

“Fundamentally speaking, we still see higher equity prices over the medium-term, but now view a short-term pullback as the path of least resistance,” he wrote. He’s now bearish on the S&P 500 with a 6,450 target and a 6,700 stop loss — a sell order, in this case, that allows traders to limit losses — but “emphasize that this is not a top call, rather a call for a simple and healthy pullback.”

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Also read: Why the Fed’s first rate cut in 9 months could derail the stock-market rally — and how investors can prepare

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