A looming stock market sell-off could be on the horizon, as signaled by one of Wall Street’s most trusted figures.
Renowned strategist Tom Lee from Fundstrat, known for his historically bullish stance even during skeptical times, has sounded an alarm in a recent note. His typically optimistic forecasts have proven profitable for investors who followed his lead. However, his current warning carries weight due to its rare nature.
Despite Lee’s continued overall bullish sentiment for the latter half of the year, he has identified concerning indicators that prompted him to issue a tactical alert of an impending sell-off in the upcoming weeks.
As Lee remains watchful, he emphasized the upcoming significance of the July jobs report and July Consumer Price Index (CPI). He urged investors to exercise caution, stating, “We believe investors just simply need to be vigilant.” Lee highlighted a potential scenario where an unexpectedly robust jobs report could challenge the prevailing belief that the Federal Reserve has concluded its interest rate hikes. Such a shift in rate hike expectations could lead to a negative surprise for the market.
Adding to the apprehension, seasonal data indicates historically weaker performance for the stock market in the months of August and September. Market strategist Ryan Detrick from Carson Group pointed out this seasonal trend, suggesting that the market might be poised for a modest pullback of around 5%.
Compounding the concerns are signs that some Wall Street strategists are pursuing the current market rally, raising their year-end price targets for the S&P 500 despite its strong year-to-date gains. This situation hints at a potential deceleration in stock market momentum.
However, perhaps the most troubling factor is a recently triggered technical sell indicator. Lee spotlighted DeMark Analytics’ “13” sell signal, a measure of the percentage of stocks above their 200-day moving average on the New York Stock Exchange. This indicator serves as a momentum gauge for the stock market. A higher percentage of stocks above their 200-day moving average is generally favorable, but the activation of the “13” signal via DeMark’s proprietary technical indicators implies an impending reversal in the stock market.
Historically, the last three instances this signal emerged within the past year were followed by significant stock sell-offs: on August 17, the S&P 500 experienced a subsequent 19% decline; on December 1, a fall of 8%; and on February 2, a drop of 9%.
Lee acknowledged the possibility of this “topping ’13′” index signaling a broader period of turbulence. While maintaining vigilance, he emphasized, “But for now, we believe investors just simply need to be vigilant.” As Wall Street remains on the precipice of potential changes, Lee’s insights underscore the importance of a watchful and adaptable approach.
