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U.S. Stocks: Does a Summer Market Correction Loom?
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According to nearly a century of data from Charlie Bilello of Creative Planning (@charliebilello), as of Friday the S&P 500 Index is off to its 12th best start to a year and the best start to a presidential election year in history.
The bullish price action in 2024 once again illustrates how the U.S. stock market is the master manipulator. Despite a regional banking scare, two new wars, and inflation fears and recession fears, stocks have climbed the proverbial Wall of Worry and have been driven higher by scorching hot growth in the A.I. industry and mega-cap tech juggernauts like Apple ((AAPL - Free Report) ), Nvidia ((NVDA - Free Report) ) and Meta Platforms ((META - Free Report) ).
The question now for investors is, “How much longer will the equity bull market last?”
Because investing is heavily dependent on time frame, the answer requires some nuance. For example, if you are a long-term investor who is allocating a portion of your paycheck to the S&P 500 Index, the best course of action is to continue to dollar-cost average into stocks. History suggests that when the S&P 500 breaks out to new highs after such a hot start, the momentum continues and the bull market has more legs. Conversely, for active traders, the risk-reward at these levels is not as favorable as it was before.
Does a Late Summer Stock Market Correction Loom?
This year is another example of how predicting tops or corrections in a bull market can be futile. That said, weighing the risks and rewards using data is a worthwhile endeavor. If the reward to risk is not as favorable as before, investors may want to save some cash to buy a potential pullback in equities. Below are five reasons a late summer pullback may be in store for U.S. equities, including:
1. Historical Stock Market Seasonality Trends
Seasonality trends suggest that the Nasdaq tends to rally until mid-July, consolidate its gains until late October, then rally into year-end. Thus far, the Nasdaq is following this pattern perfectly.
Image Source: AlmanacTrader
2. NAAIM Exposure Index
The NAAIM Exposure Index represents active investors’ average exposure to U.S. equity markets. Currently, NAAIM is flashing a 103 reading, meaning that the average active investor is fully invested and on margin. The past three times this has occurred, it led to a short-to-intermediate-term correction in equities.
Image Source: NAAIM
3. Slim Leadership
Mega-cap stocks have been so strong that they have dragged up the major equity indices. However, the market participation data is currently becoming too extreme to ignore. The percentage of S&P 500 stocks outperforming the S&P 500 Index over a rolling 21-day period dropped to the lowest in history (data via Dean Christians (@deanchristians).
Image Source: SentimenTrader
4. Distance from Moving Average & Big Round Numbers
The Nasdaq 100 ETF ((QQQ - Free Report) ) is more than 8% above its 50-day moving average. Experience tells me that such a stretched level is unlikely to be sustainable and will lead to a correction or at least some sideways action. Furthermore, QQQ is approaching the psychologically significant big round number of $500.
Image Source: TradingView
5. Election Uncertainty
Pre-election trading leads to uncertainty, which can lead to volatility in an election year. Currently, the U.S. is the most divided it has been in recent memory. After a poor debate performance, rumors are swirling that President Biden may be replaced on the Democratic ticket. Each day, it seems like the polls and, more importantly, the Vegas odds of each candidate are fluctuating dramatically. The election uncertainty will likely lead to some violent trading in the coming months.
Bottom Line
Stocks are off to one of their best starts in history in 2024. However, several data points suggest that a short-term correction may loom.
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U.S. Stocks: Does a Summer Market Correction Loom?
According to nearly a century of data from Charlie Bilello of Creative Planning (@charliebilello), as of Friday the S&P 500 Index is off to its 12th best start to a year and the best start to a presidential election year in history.
The bullish price action in 2024 once again illustrates how the U.S. stock market is the master manipulator. Despite a regional banking scare, two new wars, and inflation fears and recession fears, stocks have climbed the proverbial Wall of Worry and have been driven higher by scorching hot growth in the A.I. industry and mega-cap tech juggernauts like Apple ((AAPL - Free Report) ), Nvidia ((NVDA - Free Report) ) and Meta Platforms ((META - Free Report) ).
The question now for investors is, “How much longer will the equity bull market last?”
Because investing is heavily dependent on time frame, the answer requires some nuance. For example, if you are a long-term investor who is allocating a portion of your paycheck to the S&P 500 Index, the best course of action is to continue to dollar-cost average into stocks. History suggests that when the S&P 500 breaks out to new highs after such a hot start, the momentum continues and the bull market has more legs. Conversely, for active traders, the risk-reward at these levels is not as favorable as it was before.
Does a Late Summer Stock Market Correction Loom?
This year is another example of how predicting tops or corrections in a bull market can be futile. That said, weighing the risks and rewards using data is a worthwhile endeavor. If the reward to risk is not as favorable as before, investors may want to save some cash to buy a potential pullback in equities. Below are five reasons a late summer pullback may be in store for U.S. equities, including:
1. Historical Stock Market Seasonality Trends
Seasonality trends suggest that the Nasdaq tends to rally until mid-July, consolidate its gains until late October, then rally into year-end. Thus far, the Nasdaq is following this pattern perfectly.
Image Source: AlmanacTrader
2. NAAIM Exposure Index
The NAAIM Exposure Index represents active investors’ average exposure to U.S. equity markets. Currently, NAAIM is flashing a 103 reading, meaning that the average active investor is fully invested and on margin. The past three times this has occurred, it led to a short-to-intermediate-term correction in equities.
Image Source: NAAIM
3. Slim Leadership
Mega-cap stocks have been so strong that they have dragged up the major equity indices. However, the market participation data is currently becoming too extreme to ignore. The percentage of S&P 500 stocks outperforming the S&P 500 Index over a rolling 21-day period dropped to the lowest in history (data via Dean Christians (@deanchristians).
Image Source: SentimenTrader
4. Distance from Moving Average & Big Round Numbers
The Nasdaq 100 ETF ((QQQ - Free Report) ) is more than 8% above its 50-day moving average. Experience tells me that such a stretched level is unlikely to be sustainable and will lead to a correction or at least some sideways action. Furthermore, QQQ is approaching the psychologically significant big round number of $500.
Image Source: TradingView
5. Election Uncertainty
Pre-election trading leads to uncertainty, which can lead to volatility in an election year. Currently, the U.S. is the most divided it has been in recent memory. After a poor debate performance, rumors are swirling that President Biden may be replaced on the Democratic ticket. Each day, it seems like the polls and, more importantly, the Vegas odds of each candidate are fluctuating dramatically. The election uncertainty will likely lead to some violent trading in the coming months.
Bottom Line
Stocks are off to one of their best starts in history in 2024. However, several data points suggest that a short-term correction may loom.