According to technical analyst Mark Newton of Fundstrat, the stock market could experience a 7% correction by mid-November. Newton believes that investor complacency and weak seasonal trends could trigger this decline. However, he views any potential pullback as a buying opportunity, commonly known as a “buy the dip” strategy.
Newton stated in a note to clients that he anticipates the S&P 500 to weaken heading into November as investor sentiment reaches complacent levels just before the general election on November 5. While he maintains an intermediate-term bullish outlook, Newton believes that a consolidation phase is necessary for US equities, especially with the upcoming election.
Although Newton expects a correction in the stock market, he emphasizes that it is likely to be a short-term event rather than the beginning of a larger decline. This aligns with the advice from Fundstrat’s Tom Lee, who consistently encourages investors to see market declines as opportunities to buy at lower prices.
Newton is closely monitoring the 5,900 level on the S&P 500 as potential resistance for the index. As of Friday, the S&P 500 was trading around 5,850. He highlighted various reasons for his near-term bearish outlook, including low equity put/call levels indicating complacency, diminishing breadth, poor seasonal trends, and underperformance in the technology sector.
One key factor contributing to Newton’s short-term bearishness is the length of the current rally, which has lasted for 88 days. This duration mirrors the rally that occurred from April 19 to July 16 before a sell-off occurred. Newton believes that the current rally may “run out of steam” based on this time perspective.
Newton also pointed out other technical weaknesses he is monitoring, such as negative divergences in momentum indicators like the RSI and MACD, a lack of bearish investors according to AAII investor sentiment data, and seasonal cycles indicating a peak in late October followed by a sell-off in November.
Despite the market’s resilience during a historically challenging period in election years, Newton warns investors not to assume that a continuous rally is guaranteed for the remainder of the year. It is important to remain vigilant and prepared for potential shifts in market trends.
Source: Business Insider