It’s real: Higher taxes are coming

Joe Perry
By :  ,  US Market Analyst

It’s real: Higher taxes are coming

“Sources” have relayed to the media that US President Joe Biden will propose raising marginal income taxes to 39.6% from 37%.  In addition, these sources also say that he will also propose nearly doubling taxes on capital gains to 39.6% for people earning more than $1 million. “Sources”….do you believe them?  Stock markets do (at least today).  Stocks initially sold off on the first headline that capital gains could be as high as 43.4% for the wealthy, then had a second wave of selling come in, as more headlines came across.  Additionally, algos jumped on the quick move lower.  The result: the S&P 500 is 50 handles off the highs.

How does the stock market work?

But how much further can indices go?  Although 50 handles may sound like a lot, yesterday’s low was 4126.35 in SPX.  Today's low so far is 4123.69, only taking out yesterday’s lows by a few handles.  Tuesday’s low was 4118.38, and the large index couldn’t take that out today!  Below Tuesday’s low, support crosses at the upward sloping trendline of an ascending wedge, near 4100. If price breaks below, there is a gap fill from April 1st at 4020.63. 

Source: Tradingview, City Index

Recall that for the last 13 months SPX has been trading higher off the pandemic lows at 2191.85.  Since then, price is up nearly 100%.   Therefore, traders should not be surprised if the market pulls back 10%, which would put the large cap index only down near 3,730. With such a quick move in just over a year, traders may even expect a correct such as this.  On a weekly timeframe, this would confluence near the long-term upward sloping trendline (green) from January 2018 and the 50% retracement level from the October 2020 lows to last week’s highs!

Source: Tradingview, City Index

The question is one of timing.  Is a near 40% tax on capital gains enough to makes traders/investors bail on current positions?  Perhaps it won’t be until the Fed indicates that they are ready to begin tapering? Maybe it will be a “crypto collapse”? “Sell in May and go away”? The catalyst for a larger pullback is unknown.  One thing that seems certain right now though, is that higher taxes are ahead. 

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