Moody's Weighs In: Will the Downgrade Halt the Rally?
Examining the Potential Market Reaction to the US Credit Outlook
Top credit rating agency Moody's has lowered its assessment of the United States' ability to repay its debts from the highest level (AAA) down one step to AA1. This puts Moody's in line with other major agencies. They cited concerns about the increasing amount of government debt and the growing cost of managing that debt due to high interest rates and large budget deficits. Moody's analysts also noted that if tax cuts from 2017 are extended as expected, it would significantly add to the national debt over the next decade, projecting the deficit and debt-to-GDP ratio to rise considerably by 2035.
As you know, I focus more on price action than on news. News often acts as the catalyst for market reversals based on price conditions, as we saw when the S&P 500 and Nasdaq were overbought in February 2020 (pre-COVID), September 2018 (tariff war 1.0), and even recently in February 2025 (tariff war 2.0).
Last Wednesday, my mid-week publication highlighted overbought conditions in several securities, with a volatility index warming up for a bounce, the publication can be read clicking in the image below:
Today, I add two factors to consider caution for long positions next week, the first one is the Put/Call Option Ratio, which is a measure of market sentiment and as indicated by the fear and greed index; this index is in greed mode. Put options are typically bought to bet on a price decrease, while call options are bought to bet on a price increase. A low ratio like the one we have today (more calls being bought relative to puts) can suggest that investors are becoming increasingly bullish, anticipating a price increase. Historically, extremely low levels can sometimes indicate overbought conditions and a potential for a bearish reversal, as bullish sentiment may become overextended. Notice the lows in July 2024, ahead of a multi-week pullback in the stock market, or in January and February 2025.
Does it always precede a bear market or major correction? Not necessarily, but as highlighted with the yellow circle, the S&P 500 saw a decline beyond -2% in October 2024; so the context suggests caution for long positions.
So the Moody’s news came in overheated market conditions described in the Wednesday’s edition, and more overheated conditions as the put-call options have joined the warning context.
Does it mean that this was a bear market rally and we will go back to $4,800? I have provided solid statistics and also back on Wednesday, a chart that answers that question. You can access both publications here:
Fundamental Analysis for Magnificent 7 and The Upcoming Move for SPX
Is the Stock Market Overheated? A Healthy Pullback on the Horizon?
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Learning with the current technical charts and recent price action is much better than reading a book with charts from 2006 or other previous years. Trading is not only about numbers but mostly about emotions, and I’m pretty sure you remember very well how you felt in March and April 2025, so checking recent charts with educational content about technical analysis is more effective.
Last but not least, I’m using more the chat, this coming week the crypto update goes to this channel, obviously with observations for the S&P 500. Make sure you have access.
For the week that just ended, we saw the squeeze that was anticipated last Saturday, since the market managed the three indicators mentioned in favor of the bulls, get access to the publication where also the Bitcoin, Tesla, and small caps rallies were anticipated as the bearish setups for Gold and Silver.
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SPX:
Having mentioned two factors to add to the cautionary context, this is the second one: