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Even though the stock market continues to surge more than 25% from its mid-October low, some investors are expecting a correction.
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Fundstrat technical analyst Mark Newton expects more upside in the second half, but is looking for potential red flags.
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According to Fundstrat, these are eight warning signs investors should watch for a potential selloff.
Despite the stock market rallying nearly 30% from its mid-October low, not all investors are convinced that a new bull market has begun.
For these investors, Fundstrat technical analyst Mark Newton has highlighted the key warning signs to watch for when assessing whether a market correction is imminent.
To be clear, Newton is bullish on stocks for the second half of 2023. He raised his technical price target for the S&P 500 to 4,700 from 4,500, and said most of the warning signs he’s watching haven’t flashed yet, suggesting there might be more upside down ahead.
“Seasonal trends remain quite bullish for the pre-election years and markets have just [seen] the best two quarters of the entire four-year cycle. However, July is normally always bullish,” Newton said.
But since 1980, the S&P 500 has seen an average intra-year decline of about 14% each year, even when it ends with annual gains. So there could still be a sell-off on the horizon, and investors need to be prepared.
These are the eight warning signs investors should watch to gauge whether a stock market correction is imminent, according to Fundstrat.
1. Evidence of speculation and complacency
“While a few investor sentiment polls have turned more bullish, these are not yet at the levels of complacency/speculation that have driven past market downturns,” Newton said. Investors can look to CNN’s Fear and Greed Index or the AAII’s Weekly Investor Sentiment Survey to gauge investor complacency levels.
2. Defensive Force
“When utilities, commodities and REITs begin to strengthen strongly on an absolute and relative basis, this can normally precede market corrections,” he said.
3. Negative momentum and magnitude divergence
“When fewer and fewer stocks are participating in the rallies, that served as a warning – see early 2020, as well as 2021, as examples,” Newton said. So far this year, mega-cap tech stocks have generated the bulk of stock market gains.
4. Seasonality issues
“US equities are now exiting the two best quarters of the entire four-year cycle. While the pre-election years as a whole tend to be bullish, the second half of 2023 could show more volatility.”
5. DeMark’s Exhaustion
“When TD Combo, TD Sequential 13 Countdown Signals appear on weekly and/or monthly charts, markets may show potential trend reversals,” Newton said, referring to Tom Demark’s indicators.
They help technical analysts gauge the supply and demand for a given security and have been known to highlight important inflection points in price trends. Indicators are commonly used by various Wall Street strategists.
6. Deteriorating trend in key market sectors
“If/when these sectors [financials and technology] begin to break existing uptrends, markets may face possible headwinds.”
7. Overbought market conditions on a weekly and monthly basis
“While some investors have noticed that US equities are overbought, this was mostly seen only in $QQQ, not DJIA, or SPX’s equally weighted weekly or monthly charts.”
8. Intra-market divergence
“Markets are healthier when indices move in tandem. When that changes and various indices start to lag, that can be problematic and a warning sign.”
Read the original article on Business Insider