Fundstrat's technical analyst Mark Newton warned that the US stock market may experience a 7% pullback in the coming weeks. He pointed out that the S&P 500 Index may weaken in November due to investors' excessive optimism. Despite the bullish mid-term outlook, Newton believes that there are doubts about the continued rise in the stock market, with 5900 points being seen as a potential resistance level. He mentioned that market complacency, breadth weakening, and seasonal factors are all warnings of possible trend changes in the coming weeks
Technical analyst Mark Newton from Fundstrat stated that the U.S. stock market seems poised for a 7% pullback by mid-November.
In a report last Thursday, Newton told clients that he expects the S&P 500 Index to soften in November as investor sentiment reached complacent levels ahead of the November 5th election.
"While the intermediate-term bullish outlook remains very much intact, it is questionable whether U.S. stocks can continue to rise without any consolidation," he said.
Newton noted that he believes the potential market adjustment may be "temporary" and not the start of a larger decline, aligning with the consistent view of Fundstrat's co-founder and head of research, Tom Lee, that investors should view any market declines as buying opportunities.
Newton is monitoring the 5900 level of the S&P 500 Index as a potential resistance level. The S&P 500 Index closed around 5850 points last Friday.
Explaining further, Newton cited reasons to remain cautious about potential trend changes in the stock market in the coming weeks, including recent market complacency (judged by the low cost of put options relative to call options), weakening breadth, poor seasonal trends, November's cyclical factors, and recent underperformance of the largest sector in the S&P 500 Index, the technology sector.
A "key reason" Newton has turned bearish on U.S. stocks in the short term is the 88-day market rebound since early August, which coincides with the duration of the rebound from April 19 to July 16, followed by a sell-off.
Newton stated that from a timing perspective, this is "why this rebound may be 'losing steam'."
Other technical signs of weakness he is monitoring include: momentum negative divergence measured by the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicators, AAII investor sentiment data indicating a lack of bearish investors, and seasonal cycles showing the market peaked in mid to late October and then encountered selling in November.
"In one of the worst election years in history, the market seems to have 'dodged a bullet.' However, investors should not assume that the year-end rally will be smooth sailing," Newton said