One of Wall Street's top technical analysts says now is the time to short stocks as a correction looms

• Now is the time to short stocks, according to technical analyst JC Parets of All Star Charts.
• Parets nailed the bull market rally in stocks since the 2022 lows, but now he expects a correction.
• "Welcome to February, what is historically one of the worst months of the entire year," Parets said.

For technical analyst JC Parets of All Star Charts, now appears to be a great time to sell stocks short.

Parets nailed the stock market rally that began in 2022, but now he expects a correction as defensive sectors start to outperform the broader market, the US dollar shows continued strength, and the stock market enters what has historically been one of the worst months of the year.

"The best 3-month period of the year is officially over (Nov-Jan). As usual, that worked out really well, as long as you owned stocks. Now welcome to February, what is historically one of the worst months of the entire year," Parets tweeted on Wednesday.

February is on average the third most volatile month of the year for stocks, according to S&P 500 data going back to 1950, and it's the second worst month of the year for returns, according to All Star Charts analyst Grant Hawkridge.

According to Parets, several clues suggest a correction in the stock market is imminent.

"The dollar has been strong throughout all of January. That was the first heads up. The new highs list peaked in mid-December on both the NYSE and Nasdaq. So you can argue that we've been in a correction already, and that it's just about to get worse," Parets wrote in a note on Wednesday.

But the biggest sign of imminent stock market weakness, according to Parets, is the fact that investors have been rotating into defensive assets over the past few weeks.

Specifically, the consumer staples sector has outperformed the S&P 500 in recent weeks, as has US Treasury bonds relative to more risky high-yield bonds. Both are defensive asset classes relative to the broader market, and both broke above their December lows in January, which has turned into a key technical level to watch.

"If Consumer Staples relative to the S&P 500 are above those December lows, we want to be short equities. If US Treasuries are above those December lows relative to High Yield Bonds, we want to be short equities," Parets said.

Finally, seasonal stock market data tied to the fourth year of a Presidential election cycle show that stocks are typically weak and chop sideways in February and March, once again supporting the idea that a correction is imminent.

"We're in month 20 of this ongoing bull market. We saw a nice correction in Q3 last year that came at a perfectly normal time. And I'm not saying this one needs to take as long, nor does sentiment need to adjust as violently as it did then. But bull markets do correct... And now I think things could get uglier before they get better again," Parets said.