VOO stock: Here’s why the S&P 500 Index could be on the verge of a reversal

The Vanguard S&P 500 ETF (VOO) stock has pulled back in the past seven consecutive days and is hovering at its lowest level since June 11. There is a risk that the recent stock market rally is about to take a breather. 

S&P 500 Index has fallen despite some major good news

The S&P 500 Index and its top ETFs, like VOO and SPY have pulled back despite some good news, including the recent US-Iran deal that has pushed crude oil prices much lower than where they were a few months ago. Brent has dropped to $70, while the West Texas Intermediate (WTI) has moved to $69.

The falling oil prices are beneficial to the stock market because of its impact on consumer and producer inflation. Data released on Thursday showed that the headline PCE rose from 3.8% to 4.1% in May, moving higher than the 2% target. 

As such, with energy, metals, and fertilizer prices falling, there is hope that inflation will drop. This explains why the odds of the Federal Reserve hiking interest rates this year have dropped substantially in the past few days.

There are signs that corporate earnings are gaining momentum. A report released this week showed that Micron’s revenue jumped by over 300% in the last quarter, and the management believes it has more gains to go. 

Data compiled by FactSet shows that the average earnings growth for the second quarter is 22%. Historically, the real number is usually much higher than the estimates. For example, the estimate for the first quarter was 12%, and the real figure came out at 28%, the highest level in years.

Additionally, there are signs that the index is highly undervalued, with the forward price-to-earnings ratio being 22. While this is higher than the five-year average of 19, the index is seeing stronger revenue growth than it had in this period.

Potential risks may drag the VOO ETF stock in the near term

There is a risk that the S&P 500 Index will retreat in the coming weeks. One of the risks is that the current gains are being led by the memory industry. Sandisk stock has jumped by 855% this year, while Micron, Western Digital, and Seagate have soared by over 263%. 

The other top gainers this year are companies like Intel, Marvell, Dell, Corning, Applied Materials, and AMD. All these stocks have jumped because of the role in the artificial intelligence (AI) industry. They are all suppliers to hyperscalers like Microsoft, Meta Platforms, and Google.

The risk is that these companies will reverse if demand from hyperscalers starts falling. This is a possible thing since most of them have plunged in the past few weeks. Microsoft stock has dropped by 36% from its highest point in July last year, while Amazon has fallen by 18%. Google has fallen by over 15% from the year-to-date high.

VOO stock price technical analysis

Vanguard S&P 500 ETF | Source: TradingView

Technicals suggest that the VOO stock price may drop further in the near term. It has dropped below the 25-day Exponential Moving Average (EMA). 

A closer look shows that the fund formed a double-top pattern, a common bearish reversal sign. Also, it has formed a bearish divergence pattern as the Relative Strength Index (RSI) and the MACD have continued falling.

Therefore, the stock will likely continue falling as sellers target the 100-day moving average of $655. This retreat will likely happen before the earnings season starts and will be followed by more gains.