Stocks are primed for a 10% correction because the current rally isn't broad enough, strategist says

  • There could be a 10% correction in stocks, according to Piper Sandler's Craig Johnson.
  • Such a sharp correction would wipe out the S&P 500's gains for the year, taking the index to 4,500.
  • That reduction could happen as early as next month, Johnson warned.

The stock is set to see a 10% price correction soon. This is due to a handful of technical signals flashing in the market, suggesting that stocks are not ready to rise further, according to Craig Johnson, chief market technician at Pipeer Sandler.

Johnson's prediction is contrary to what most investors think, given the S&P 500's stellar rally since October. Benchmark remains unchanged reaching all-time highs in 2024 as the hype over AI and expectations of Fed rate cuts continue to dominate the market.

But a closer look at the rebound shows a more worrying picture, Johnson said. All three benchmarks are now at the upper end of their price ranges over the past 18 months, a sign that a pullback could soon be in sight.

“You can see that after that big drop off the October 2023 lows, we are now pushing towards the upper end of the very well-established 18-month price channel,” Johnson said, speaking with CNBC On Wednesday. "This is not where you start the next stretch. Technically, you don't do that at the end of a canal."

Meanwhile, the stock rally still has room to expand. While investors have been pouring their money into mega cap tech stocksHealthcare and financial stocks have lagged, a sign that the rally has not occurred across the market.

"We need to see more evidence. Because right now, the breadth of the market has been steadily contracting throughout 2024," Johnson said. "This is a market that will likely enter an HLTR, or a high level trading range, and right now, being at the upper end of that channel, now is a time where this market is certainly vulnerable to seeing the least a 10% correction," Johnson warned.

A 10% drop in stocks could send the S&P 500 back to around 4,558, erasing all the gains the index has made this year. And that correction could happen as early as March, Johnson predicted, spelling trouble for traders in the coming weeks.

Traders have remained bullish on stocks over the past few weeks, despite the imminent risk of recession, or risk that the Fed to keep interest rates higher for longer. 74% of investors felt neutral or optimistic about stocks over the next 6 months, according to the The latest AAII investor sentiment survey.

Meanwhile, markets are still pricing in a 40% chance that the Federal Reserve could cut rates by at least 100 basis points by the end of the year, according to the CME FedWatch tool, although central bankers have only forecast 75 basis points of rate. cuts.

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