(Bloomberg) -- The S&P 500 Index is approaching a technical roadblock after eclipsing 5,000 for the first time — triggering a contrarian sell signal for stocks on Friday, according to Piper Sandler & Co.’s Craig Johnson.
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Johnson, the firm’s chief market technician who correctly called last year’s equity rebound, said US equities are flashing a sell signal for the first time since late August. His metric is a reading of US shares that trade above their 40-week moving average has dropped below their 10-week moving average for a second week.
“There’s gotta be a correction looming just around the corner in the stock market,” Johnson said in an interview. “It’s going up on weak footing.”
Johnson sees the S&P 500 pushing higher before pulling back between 5% to 10% in the coming weeks. He said equities benchmark could bottom in the spring near its July peak of 4,600, nearly 9% below Friday’s close.
Technical levels are important to monitor because for all the discussion of valuations and interest rate levels, at some point technicals and positioning drive near-term price action. For chart watchers, now is one of those times, with the S&P 500 rising in 14 of the last 15 weeks — something it hasn’t done since 1972.
What’s more, the percentage of S&P 500 companies that have hit fresh 24-week highs hasn’t budged above 20% even as the index climbed to an intraday high of 5,030 on Friday, Piper data show. That will likely challenge the upper end of its 15-month price channel, Johnson explained.
That said, Johnson is bullish on stocks over the long haul, with a 5,050 price target on the S&P 500 in 2024. He expects the index to bottom by mid-March to early April as investors sell stocks for capital gains distributions before filing their taxes. After that, he sees a summer rally that fades into the November US presidential election before another bounce higher in late 2024.
To Mark Newton, head of technical strategy at Fundstrat Global Advisors — who accurately called the S&P 500’s downturn in 2022 and subsequent rebound last year — the disparity between the top performing stocks within Big Tech and the broader market doesn’t necessarily point to a severe selloff.
The S&P 500 outperformed an equal-weight version of the index by 23% over the past year, one of the largest divergences ever. But since the 1970s that’s been a good sign for returns, with the equities benchmark gaining 16% on average over the subsequent 12 months on a forward basis, Newton said.
“Everybody recognizes this divergence and wonders when it’s going to end, but the conclusion isn’t to run off and sell the S&P 500,” said Newton, who has a year-end target of 5,175 for the S&P. “Markets can remain overbought longer than investors can remain solvent.”
Newton thinks the index can push even higher before selling off from 5% to 7% in the spring. While the tech sector holds a record weighting in the S&P 500 at around 30%, health-care and financials account for about a quarter of the gauge combined and can support the market if tech falters, he added.
Meanwhile, Dan Wantrobski, technical strategist at Janney Montgomery Scott, also sees a 5% to 10% correction this spring on deteriorating market breadth, even though he also thinks the S&P 500 will continue to grind higher to 6,000 in the coming years.
Wantrobski is looking at the Bloomberg advance-decline line for shares that trade on the New York Stock Exchange — another popular technical indicator. It remains well below its peak in 2021 and is showing signs that buying power is getting narrower even with major US stock indexes at records.
“Small caps, mid caps and the NYSE Composite still haven’t broken out to new records,” Wantrobski said. “So they need to play catch up to the broader market or there’s going to be a day of reckoning for large caps in the first half of this year.”
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