The stock market could face a 7% correction by mid-November, according to technical analyst Mark Newton of Fundstrat. This potential decline is attributed to investor complacency and weak seasonals, which could trigger a pullback just ahead of the general election on November 5.
Newton views any potential correction as a “buy the dip” opportunity, emphasizing that it would be a short-term correction and not the start of a larger decline. He believes that the current rally in stocks, which began in early August, may run out of steam soon, given its 88-day duration – similar to the rally that occurred from April 19 to July 16 before a sell-off ensued.
Key reasons for Newton’s bearish short-term outlook include negative divergences in momentum indicators, such as the RSI and MACD, a lack of bearish investors based on AAII sentiment data, and seasonal cycles indicating a peak in the stock market in mid-to-late October followed by a sell-off through November.
As the S&P 500 hovers around the 5,850 level, resistance at 5,900 is being closely monitored by Newton. Factors like low equity put/call levels, waning breadth, and poor performance of the Technology sector are all signaling alertness for a possible trend change in the coming weeks.
Although the market has remained relatively resilient during a historically challenging period in most election years, investors should not assume that the current rally will continue uninterrupted. Newton’s analysis suggests that caution is warranted, and any potential pullback should be viewed as an opportunity to buy the dip.
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