Market Volatility Alert: A 7% Correction Looms
Renowned technical analyst Mark Newton of Fundstrat is sounding the alarm: the stock market is poised for a 7% correction by mid-November. Newton attributes this predicted downturn to investor complacency and weak seasonal trends, which could trigger a decline in the S&P 500.
Complacency Reaches New Heights
Newton warns that investor sentiment has reached complacent levels, with equity put/call ratios indicating a lack of caution among investors. This, combined with waning market breadth and poor seasonal trends, creates a perfect storm for a potential correction.
A Historical Pattern Emerges
Newton notes that the current rally, which began in early August, has lasted 88 days – eerily similar to the April 19 to July 16 rally that ended in a sell-off. This historical pattern suggests that the current rally may be running out of steam.
Technical Weakness Abounds
Newton is keeping a close eye on several technical indicators, including negative divergences in momentum as measured by the RSI and MACD indicators. Additionally, the lack of bearish investors, as indicated by AAII investor sentiment data, and seasonal cycles that point to a peak in the stock market in mid-to-late October followed by a sell-off through November, all contribute to his bearish short-term outlook.
A Buying Opportunity in Disguise?
While Newton expects a correction, he views it as a “short-term correction only” and not the start of a larger decline. In fact, he believes it could present a “buy the dip” opportunity for investors. With the S&P 500 trading at around 5,850, Newton is monitoring the 5,900 level as potential resistance for the index.
Stay Vigilant, Investors
Newton’s warning serves as a reminder that the stock market is not immune to volatility, even in the midst of a strong rally. As the general election approaches, investors would do well to remain alert and prepared for a potential correction.
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