Stocks are primed for a 10% correction because the current rally isn't broad enough, strategist says
- There could be a 10% correction coming to stocks, according to Piper Sandler's Craig Johnson.
- A correction that steep would wipe out the S&P 500's gains for the year, taking the index to 4,500.
Stocks are primed to soon see a 10% price correction. That's due a to handful of technical signals flashing in the market, which suggest stocks that aren't ready to vault higher just yet, according to Pipeer Sandler's chief market technician Craig Johnson.
Johnson's prediction is contrary to what most investors think, given the S&P 500's stellar rally since October. The benchmark index keeps punching out record highs in 2024 as the hype for AI and the expectation for Fed rate cuts continues to dominate the market.
But a closer look at the rally shows a more worrying picture, Johnson said. All three benchmark indexes are now at the upper end of their price range over the last 18 months — a sign a pullback could soon be in the cards.
"You can see that after that big run off of the October 2023 lows that we're now pressing to the upper end of the very well-established 18-month price channel," Johnson said, speaking to CNBC on Wednesday. "This is not where you start the next leg up. You don't do that at the end of a channel, technically."
Meanwhile, the rally in stocks still has room to broaden out. While investors have been plowing their cash into mega-cap tech stocks, healthcare and financials stocks have been lagging behind, a sign that the rally hasn't taken place across the entire market.
"We need to see more evidence. Because right now, the breadth of the market has been steadily contracting throughout all of 2024," Johnson said. "This is a market that's probably going to enter an HLTR, or a high-level trading range, and at this point in time being at the upper end of that channel, now is a time where this market is certainly vulnerable to see at least a 10% correction," Johnson warned.
A 10% stock drop could bring the S&P 500 back to around 4,558, erasing all of the gains the index has made this year. And that correction could happen as soon as March, Johnson predicted, spelling trouble for traders in the coming weeks.
Traders have remained bullish on stocks over the last few weeks, despite the looming risk of recession, or risk that the Fed will keep interest rates higher for longer. 74% of investors felt neutral or bullish on stocks over the next 6 months, according to the AAII's latest Investor Sentiment Survey.
Meanwhile, markets are still pricing in a 40% chance the Fed could cut rates by at least 100 basis-points by the end of the year, according to the CME FedWatch tool, though central bankers have only forecasted 75 basis-points worth of rate cuts.